Are There Credits for First-Time Homebuyers?
Buying your first home is one of the most memorable moments of your life. It's a momentous and stressful decision that ends with having a place to call your own — a thrilling milestone for many people.
Fortunately, first-time homebuyers are eligible for incentives to make things more affordable, including tax credits, grants and various programs. In this homebuyer's guide, we'll discuss how to determine if you qualify as a first-time homebuyer and the many benefits that simplify your financial decisions.
Are You a First-Time Homebuyer?
What is a first-time homebuyer? Technically, the term encompasses more than people who are brand-new to homeownership.
According to the U.S. Department of Housing and Urban Development, you must meet the following requirements to be eligible for potential first-time homebuyer credits:
- You have not owned or been a co-signer on a home as a primary residence within the last three years.
- You have been a single parent who co-owned a home with a former spouse during the marriage.
- You are a displaced homemaker who only owned a home with a spouse.
- You have only owned a home that was not compliant with building codes.
- You have owned a primary residence without a permanent foundation, such as a mobile home.
In some cases, you may meet additional criteria that may align you with other first-time homebuyer programs, including:
- Proof of steady income
- A credit score of at least 620
- Proof of employment for the last two years
- Minimum of 3% down payment
- Debt-to-income ratio not exceeding 43%
Of course, there are many unique “gray-area” scenarios that could make you uncertain whether you qualify as a first-time homebuyer. For instance, suppose you are a divorced, single parent and only ever bought a home with your former spouse. If you plan to buy a home as a single parent, you will meet the criteria for a first-time homebuyer.
As another example, let's say you and your spouse are looking to buy a home, but your spouse has previously purchased a home independently or within a previous marriage. In this case, you and your spouse would also be first-time homebuyers if neither of you has owned a home in the last three years.
Benefits for First-Time Homebuyers
What perks can you take advantage of as a first-time homebuyer? We'll explain below. Remember, your eligibility for these benefits may vary depending on your financial situation.
- Down payment assistance: You may not realize you can receive help with your down payment and other upfront costs, such as closing costs. You may qualify for many different down payment assistance programs with offers that range from grants to forgivable loans to repayable loans at a lower interest rate. Every DPA program has a unique set of eligibility criteria.
- Low down payments: Three government-backed programs benefit first-time homebuyers, including the Federal Housing Authority, S. Department of Agriculture and U.S. Department of Veterans Affairs. Each program has different qualifications. They can help buyers with poor credit, as most only require a down payment of 3% or no down payment at all.
- Reduced PMI expenses: If you plan to put less than 20% down on your home, you will probably need private mortgage insurance. This extra cost could stretch your budget. Some lower-income first-time homebuyers may qualify for loans with reduced PMI rates and payments. With a VA loan, you do not need to pay PMI at all.
- Tax credits: If you apply for a DPA program, you may also be eligible for a mortgage credit certificate. An MCC is not a loan, but a federal tax credit that enables you to make deductions each year to offset what you owe in mortgage interest. However, an MCC has income limits.
IRA earnings: First-time homebuyers may also be eligible to withdraw up to $10,000 from an IRA without facing the early withdrawal penalty. For instance, a couple could take up to $20,000 total from their separate accounts to pay for their first home as long as they use the money within 120 days.
Frequently Asked Questions About Buying a Home
When buying a home for the first time, either by yourself or with a spouse, it's normal to have a million questions running through your mind as you try to navigate all this new information. We'll address some common topics and questions below to help you.
1. What Is the First-Time Homebuyer Act?
Lawmakers proposed the First-Time Homebuyer Act in April 2021. This bill would give first-time homebuyers up to 10% of their home's purchase price with a maximum of $15,000 in tax credits to make homeownership more affordable. This act would be especially beneficial for low-income individuals and couples. However, as of 2023, it has not yet become a law.
2. What Should a First-Time Homebuyer Avoid?
While you're likely doing tons of house-hunting and research to find the best loan options as a new homebuyer, you may overlook a lot of valuable tips about what you shouldn't do. Though finding your dream home feels exciting and boosts your independence, don't get too in over your head.
Many first-time homebuyers overestimate their budget and expenses and end up buying a home they cannot comfortably afford. Your mortgage payment should not represent too much of your monthly budget.
Some first-time homebuyers also skip preapproval, but this is generally not the wisest idea, especially in a competitive housing market. While a preapproval offers no guarantees, it can solidify you as a serious buyer to real estate agents.
3. What Are the Pros and Cons of a First-Time Homebuyer Loan?
Let's review a few potential upsides and downsides of using first-time homebuyer loans so you can make a better-informed decision.
Here are some typical advantages of using first-time homebuyer loans:
- Lower down payment requirement opportunities
- Lower minimum credit score thresholds
- More lenient debt-to-income ratio requirements
- Lower interest rates than conventional mortgages
Don't overlook the possible disadvantages of these loans:
- Lower limits than conventional loans
- Income limits for some programs
- Limited home equity
- PMI requirements for putting down less than 20% on a home
It's Time to Buy Your First Home With First Commonwealth Bank
There are plenty of opportunities for you to take advantage of buying a home for the first time. At First Commonwealth Bank, it's our priority to help you improve your financial confidence and achieve your goals.
Between loans, down payments and interest rates, it's easy to get overwhelmed, confused or stressed out. Our experienced and customer-oriented team is ready to guide you every step of the way as you buy your first home. We'll help you develop a borrowing strategy that fits your unique personal and financial needs. Schedule an appointment or get in touch with us online if you have any questions.