New Home Tax Credits for First-Time Homebuyers

Nobody ever said that buying a new home is cheap. There’s the down payment to consider of course, and then closing costs like title fees, underwriting fees, and real estate attorney fees. And that’s all before you even get to things like furnishings, décor, and moving costs. With all that money going out, it’s normal to want a little bit of relief. For first-time homebuyers, that relief may come in the form of new home tax credits, which can soften the blow of all those other expenditures—at least a little bit.

But first, the bad news: the first-time homebuyer tax credit, enacted as part of the Housing and Economic Recovery Act (HERA) of 2008, is no longer available. The credit, which provided new home tax credits of up to $7,500 for first-time homebuyers, ended in late 2010. Those who bought their first home prior to the dissolution of the credit could still qualify, but most new homebuyers will have to look elsewhere for their new home tax credits.

Bad news aside, however, just because there’s no longer a specific credit dedicated toward the purpose doesn’t mean that first-time homebuyers can’t catch a break. Below, we’ll go over the five new home tax credits that first-time homebuyers may be able to take advantage of. But first, let’s go over the criteria that dictate whether these credits will apply to you in the first place.

Who Qualifies as a First-Time Homebuyer?

It seems simple enough to define, but under its legal definition a first-time homebuyer isn’t always who you think it is. According to the U.S. Department of Housing and Urban Development (HUD), a first-time homebuyer is someone who meets one or more of the following criteria:

An individual who has had no ownership in a principal residence during the 3-year period ending on the date of purchase of the property. This includes a spouse (if either meets the above test, they are considered first-time homebuyers).

A single parent who has only owned a home with a former spouse while married.

An individual who is a displaced homemaker and has only owned with a spouse.

An individual who has only owned a principal residence not permanently affixed to a permanent foundation in accordance with applicable regulations.

An individual who has only owned a property that was not in compliance with state, local, or model building codes and which cannot be brought into compliance for less than the cost of constructing a permanent structure.

Talk to a real estate or tax attorney if you’re not sure whether you fall under the umbrella of a first-time homebuyer as defined by the HUD.

Five New Home Tax Credits to Take Advantage Of

Once you know that you qualify, you can take the proper steps to apprise yourself of one or more of the following new home tax credits. Note that some of these tax credits are first-time homebuyer specific while others apply to all homebuyers.

State-level first-time homebuyer tax incentives

Mortgage interest credit

Property tax deductions

Residential energy credit

Penalty-free IRA payouts

Additional Financing Tips for First-Time Homebuyers

New home tax credits can help soften the blow of purchasing a home, but they’re not the only way to make your dream of owning a home a reality. These additional tips can help you figure out your financing and set yourself up for success.

Look into all mortgage options. All mortgages are not created equal. Be sure to research all of your mortgage options, including those that offer incentives for first-time homebuyers. Some mortgages, for example, allow first-time homebuyers to put down as little as 1% to 3% for a down payment, though you’ll need to take on mortgage insurance until you hit a certain amount of equity.

Get a pre-approval… Always know what you’re working with before you start your home search. This will help ensure that you shop within your budget and that you don’t fall in love with a house that you can’t afford.

…but don’t necessarily take out the full pre-approved mortgage amount just because it’s available. What the bank says they’ll lend you and what you can reasonably afford over time are not always the same. Take a full account of your finances to determine what you can spend on your home month to month, and be sure to consider not just your monthly mortgage cost but property taxes and the other fixed and variable costs associated with owning a home (think: homeowners insurance, unanticipated repair costs, and so on).

It may be helpful to work with a financial advisor who can help you put all of your options into focus and make the smartest decisions for your financial future. They’ll also be able to assist you in determining whether your qualify for new home tax credits, and if so, which ones.