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Biden First Time Home Buyer Credit: A Complete Guide

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First time home buyers need all the help they can get in such a crazy real estate market. And while getting $15,000 towards the purchase of your home might sound too good to be true, it may soon be a reality thanks to President Joe Biden’s proposed First Time Home Buyer Tax Credit.

Here’s everything you need to know about this proposed legislation and what it might mean for you: 

What Is the Proposal?

The First Time Home Buyer Act of 2021 (H.R.2863) is a piece of legislation that’s currently being considered in the United States House of Representatives. This bill was recently introduced by Representative Earl Blumenauer (D-OR) and Representative Jimmy Panetta (D-CA) on April 28, 2021. It has not yet been passed. 

The goal of the current draft is to make it easier for first time home buyers to afford to cover the cost of the down payment, closing costs, and mortgage points in a booming housing market that’s pricing a lot of Americans out.

With home prices increasing at unprecedented rates, it has become extremely difficult for first time home buyers to save enough money to afford the down payment they need to purchase a home. To avoid paying private mortgage insurance (PMI), a down payment of at least 20% is required. 

Real Life Examples

Home prices were up 18.4% year-over-year in October, according to the S&P CoreLogic Case-Shiller 20-city home price index. Unfortunately, this is just an average. 

Many cities and neighborhoods across the United States are seeing even larger increases. For example, home prices in Tampa increased by 28.1% year-over-year, whereas home prices in Miami increased by 25.7% year-over-year. 

So first time home buyers in Miami would need to save up at least $82,500 to cover the down payment for a home at the median price of $412,500 in addition to closing costs between $6,600 and $16,500. Meanwhile, the median income in Miami-Dade County is just $54,902.

First time home buyers in Tampa would need to save up at least $70,000 to cover the down payment for a home at the median price of $350,000 in addition to closing costs between $5,600 and $14,000. However, the median income in Hillsborough County is just $48,452. 

Based on this data, there’s a clear need for financial assistance for first time home buyers trying to purchase homes in a competitive and expensive real estate market.

It’s important to note that this financial assistance isn’t guaranteed yet—lawmakers are still deciding. Right now, the bill has been introduced in the House of Representatives and has been referred to the House Committee on Ways and Means. 

How Does It Differ From the Downpayment Toward Equity Act?

The Downpayment Toward Equity Act (H.R.4495) is a separate piece of legislation that’s also being considered in the House of Representatives.

This bill was introduced by Representative Maxine Waters of the 43rd Congressional District of California on July 16, 2021, to help close the homeownership gap. Neither of these bills have been passed, so keep in mind that this information is not yet set in stone.

The goal of this legislation is to provide down payment assistance in the form of a $25,000 grant to first-generation homebuyers that meet certain income requirements. 

This grant will only be available to first-generation home buyers whose parents or legal guardians have not owned a home during the home buyer’s lifetime. Those who have spent time in foster care will also be eligible for this pathway to affordable housing. 

In order to receive the grant, the home buyer’s income must be no more than 20% over the median income for their local metropolitan area. This is specific for the proposed Downpayment Toward Equity Act (this percentage is different from that of the First Time Homebuyer Credit).

However, for high cost of living areas, the home buyer’s income must be no more than 80% over the median income for the area at the time of the purchase. 

So, if this bill is passed, if you are living in Miami, Florida, you wouldn’t be able to make more than $65,882 to qualify for the grant since the median household income in the area is $54,902. 

Federally-Backed Mortgages

Those who are looking to take advantage of the proposed legislation will be limited to certain mortgage types; specifically, these mortgages must be federally-backed. Home buyers will need to use a federally-backed mortgage to finance their home purchase through one of the five government mortgage agencies — Fannie Mae, Freddie Mac, FHA, VA, or USDA.

The $15,000 tax credit can be used to cover the down payment, closing costs, and/or mortgage points. Each of the federally-backed mortgages will have different requirements. For instance, VA loans are provided to veterans and active military personnel. 

If this legislation is passed into law, home buyers would not need to apply for the First Time Homebuyer Credit. Instead, lenders will do all the hard work, and the home buyer will receive the check at closing so long as they participate in home purchase counseling from a government-approved counselor. 

Right now, the bill has been introduced in the House of Representatives and has been referred to the House Committee on Financial Services. The outcome of these deliberations remains to be seen. 

Who Would Be Eligible for the Proposed Credit?

Based on the current version of the bill, home buyers would be eligible for the $15,000 credit if they meet the following requirements:

  • Must be a first time home buyer who has not owned a home or co-signed on a mortgage loan within the last 36 months.
  • Must be using the first time buyer tax credit for the first time as it cannot be used more than once.
  • Must be 18 years or older to prevent parents from taking advantage of the credit in their child’s name.
  • Must be purchasing a home from a non-relative, including a spouse, parent, child, aunt, uncle, cousin, or grandparent. 
  • Must have an income that’s no more than 60% above the area's median income since the program is designed for low- to moderate-income earners. (Note that this number differs from the proposed Downpayment Toward Equity Act.)

Income Requirements for South Florida Home Buyers

To access these credits in the purchase of a home:

  • Buyers in Miami-Dade County, Florida must make less than $87,843 to qualify. 
  • Buyers in Broward County, Florida must make less than $83,693 to apply successfully.
  • Buyers in Palm Beach County, Florida must make less than $133,229 to be eligible.
  • Buyers in Hillsborough County, Florida must make less than $77,523 to qualify.

However, it’s important to note that these eligibility requirements have not been signed into law. They are subject to change throughout the legislative process up until the bill is actually signed into law. 

How Much Will the Credit Be?

Unfortunately, not everyone will get the entire $15,000 credit associated with the current draft. Instead, the credit will be equal to 10% of the home’s purchase price, not to exceed $15,000 in 2021 inflation-adjusted dollars. Hypothetically, say you were purchasing a fixer-upper for $100,000, you would only receive a $10,000 credit since 10% of $100,000 is $10,000. 

A key phrase here is “inflation-adjusted dollars,” meaning that the tax credit isn’t necessarily set at $15,000. Let’s take the average rate of inflation from 2010 to 2019 to see how the amount of the tax credit may change over the years.

Assuming an inflation rate of 1.78%, here’s what the tax credit could amount to over the next five years:

  • 2021: Maximum credit of $15,000
  • 2022: Maximum credit of $15,267
  • 2023: Maximum credit of $15,539
  • 2024: Maximum credit of $15,816
  • 2025: Maximum credit of $16,098

How Would You Receive the Credit?

The best part about the First Time Home Buyer Act is that it’s extremely easy for you to get your credit. Instead of having to jump through a bunch of hoops before getting your credit, all you have to do is fill out an extra tax form when you go to file your income tax return.

If this bill ends up becoming law and you have any questions about this form, you can contact your accountant for additional information. 

Filling Out Your Taxes, Receiving Your Returns

If the law passes, this is how you will be able to receive your returns:

After you fill out the tax form, you will receive the credit on your taxes for that year. If you owe less than $15,000 in taxes for that year, you will receive the extra amount in cash deposited directly into your bank account. 

So let’s say you file your taxes, and you end up owing the IRS $2,000. The $15,000 credit will cover the $2,000 tax bill you owe and leave you with an extra $13,000 that you can use to cover housing costs.

Alternatively, let’s say you file your taxes, and you end up with a refund of $2,000 from the IRS. You will then receive your refundable tax credit and your credit for a total of $17,000 in your bank account. 

It’s important to note that if you sell your home or move within the first five years after purchasing it, you will have to pay back a portion of the credit based on how long you stayed. For example, if you sell or move within one year, you will have to repay 100% of the amount—or $15,000.

If you sell or move within two years, you will have to repay 75% of the amount or—$11,250. If you sell or move within three years, you will have to repay 50% of the amount (or $7,500). And if you sell or move within four years, you will have to repay 25% of the amount (or $3,750). 

Has a Similar Program Existed Before?

If a tax credit for first time home buyers sounds familiar, that’s probably because a similar program was established back in 2009 for homes that were purchased between January 1, 2009, and April 30, 2010.

This program was designed to help people through the 2007-2008 financial crisis and provided people with an incentive to purchase homes despite a troubled housing market. 

While the 2008 First Time Home Buyer Tax Credit looked a lot like the 2021 First Time Home Buyer Tax Credit, there are a few key differences to note. For starters, the maximum amount of the credit for this 2008 bill was lower at just $8,000 instead of the newly proposed $15,000. It’s necessary to note that in today’s dollars, $8,000 would be over $10,000 due to inflation. 

The income requirements for the 2008 version of the program were also different. Instead of having different income limits based on location, there was a set limit of $125,000 for individuals and $225,000 for joint filers no matter where they were buying. 

Like the recently proposed program, the 2008 version limited the credit to 10% of the home’s purchase price if less than the maximum credit amount. Also, like the 2021 version, the 2008 version only required a special tax form in order to “apply” and receive the credit. 

What Happens Now?

While the First Time Home Buyer Act of 2021 might seem like a great program, it doesn’t really mean anything yet since it’s only a bill and is not yet a law.

As it stands right now, the bill has been introduced in the House of Representatives and has been referred to the House Committee on Ways and Means. 

To the Committee of Ways and Means

The Committee on Ways and Means will then study the bill. During this process, government agencies are invited to comment about the bill, the bill may be assigned to a subcommittee, and hearings with expert testimony may be held.

From there, a committee vote is scheduled. Then, a “mark-up” session will be held during which members of the committee can propose revisions and additions to the bill. 

To The House of Representatives

If the bill passes the committee vote, the Speaker of the House and the Majority Leader then decide if and when to schedule a full floor vote. There will be a period of floor debate wherein members can speak on the bill before it’s actually voted upon. 

To The Senate

If the bill then passes the floor vote in the House of Representatives, it is sent to the Senate for consideration. In many cases, the Senate will choose to make changes to the bill before putting it to a vote.

If two different versions of the bill are passed by the House and the Senate, a Conference Committee will be established to work out these differences and reach a compromise. 

To the Oval Office

When both chambers reach an agreement, the bill is then sent to the President for review and signature. If the President signs the bill within 10 days, then it becomes law. 

The President could also veto the bill, but such a veto seems unlikely as the President has previously stated his support for such a tax credit. 

Basically, it’s impossible to say what’s going to happen with the First Time Home Buyer Act of 2021. It could get stuck in committee, it could fail on the House floor, or it could fail in the Senate. Ultimately, it’s definitely a piece of legislation that you should keep your eye on if you’re a first time home buyer. 

Are There Other Programs Designed to Help First Time Home Buyers?

While you may not be able to use the First Time Home Buyer Tax Credit right now since it’s not yet a law, there may be other programs out there to help you purchase your first home.

Many of these programs are administered by the states rather than the federal government. For a full list of programs offered by different states, be sure to visit the U.S. Department of Housing and Urban Development website

Florida

The state of Florida has its own Home Buyer Program that offers 30-year fixed-rate first mortgage loans to first time home buyers.

Here are the qualification requirements for this program:

  • Minimum credit score of 640.
  • Must work with an approved and participating program lender.
  • Must complete an approved home buyer education course.
  • The purchase price of the home must be below the limit set for the county. 
  • Your income must be below the limit set for the county.
  • You must meet the IRS definition of a first time home buyer in that you cannot have owned your primary residence for the last three years.

In addition to this loan program, the state of Florida also offers down payment assistance programs. The Florida Assist program offers up to $10,000 on FHA, VA, and USDA loans or $7,500 on conventional loans in the form of a 0%, non-amortizing, deferred second mortgage. 

The Florida Homeownership Loan Program offers $10,000 in the form of a 3% fully-amortizing second mortgage with a 15-year term. This loan carries a monthly payment. Therefore, it should be considered as a part of the borrower’s debt-to-income ratio (DTI). 

Final Tips for First Time Home Buyers

If you don’t have time to wait around for Congress to act on this legislation, there are still things you can do to make your home buying dreams a reality.

For example, you can look into assistance programs offered in your state. You can also check with private lenders, who are often more flexible in terms of their qualification requirements and repayment timelines. 

Vaster is a South Florida lender that’s able to offer faster and more flexible mortgage solutions to address the unique needs of first time home buyers. We have decades of experience in the real estate and lending industries and are here to help guide you through the most important purchase of your life.

Reach out to our lending experts today to see how we can help.

Sources:

First-Time Homebuyer Act of 2021 | 117th Congress

Personal Income by County and Metropolitan Area, 2019 | BEA

Local Information | HUD

About Fannie Mae & Freddie Mac | Federal Housing Finance Agency

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