What Is the First-Time Homebuyer Tax Credit?
The federal first-time homebuyer tax credit was available to Americans purchasing their first homes from April 2008 through September 2010. It has expired, but prospective homeowners can still use a number of federal policies and programs that encourage homeownership. In addition, most states have programs designed to help first-time homebuyers get the deal done.
Understanding the First-Time Homebuyer Tax Credit
The federal first-time homebuyer tax credit was part of the massive effort to bail out the U.S. economy during the Great Recession that began in 2008-2009. It applied to home purchases made by qualified first-time buyers between April 9, 2008, and July 1, 2009. The Obama administration extended the original time frame, giving buyers until Sept. 30, 2010, to close the transaction.
Credits For First-Time Homebuyers
The Deal In Depth
The first-time homebuyer tax credit allowed a tax credit for a percentage of the purchase price of a home for taxpayers who had not owned their homes in the previous three years. The original program implemented a credit of 10% of the home's purchase price, up to $7,500, which had to be repaid over 15 years in equal installments.
- The federal homebuyer tax credit ended in 2010.
- If you're a first-time homebuyer, there are other federal and state programs that can help make the purchase possible.
- One of the best-known of these programs is the FHA-backed mortgage.
An expanded version of the tax credit later increased the maximum to $8,000 and removed the repayment requirement altogether, as long as the buyer stayed in the home for at least three years.
The program timed out with homes that were in signed contracts by May 1, 2010, and closed by Sept. 30, 2010.
Who Was Eligible
The first-time homebuyer tax credit applied only to homebuyers with incomes under a set level. When the program began, an individual homebuyer was required to have a modified adjusted gross income (MAGI) of $75,000 to $95,000. The cap for a married couple filing jointly was $150,000.
This limit was raised periodically, reaching $125,000 for an individual and a $225,000 for a couple in 2010.
The first-time homebuyer tax credit was claimed on Internal Revenue Service (IRS) Form 5405, First-Time Homebuyer Credit and Repayment of the Credit.
The Reasoning Behind the Credit
The housing bubble of the early 2000s was largely caused by dubious mortgage lending practices that became common in the mid-2000s. The primary target market was struggling wage-earners eager for homeownership, who were encouraged to borrow more money than they could realistically repay.
The first-time homebuyer tax credit was created to help stabilize a real estate market that went into freefall as a result of the subprime mortgage lending crisis. With waves of mortgage defaults and foreclosures, new home buyers were hesitant to enter the market, and consumer confidence was at a low.
The tax credit was a simple way for the government to offset closing costs and moving costs to get first-time homebuyers into a home without increasing the risk to either the homebuyer or the mortgage lender.