What Is The First-Time Homebuyer Credit And Why Doesn’t It Exist Anymore? (2024)

A tax credit for first-time homebuyers was launched in 2008 after the Great Recession caused the housing market to crash.

Unfortunately, the credit isn’t available any more. It expired a decade ago under the terms of the legislation that created it. But with first-time homebuyers still encountering a historic shortage of houses for sale—even as home prices plummet amid skyrocketing mortgage rates—could the buyer tax credit make a comeback?

How the First-Time Homebuyer Credit Worked

The federal government under President Barack Obama encouraged consumers to buy their first homes by offering tax credits of $7,500 in 2008 and $8,000 in both 2009 and 2010 via the Housing and Economic Recovery Act. People who received the credit in 2008 were required to pay it back over time, but that requirement was generally waived for those who received the credit later.

The tax credit was geared toward first-time homebuyers and aimed at boosting the housing market during the crux of the financial crisis and Great Recession.

Are There Any First-Time Homebuyer Tax Incentives Now?

Each state has its own first-time homebuyer tax incentives to help homeowners with down payment assistance, closing costs and mortgage interest. Most of the programs have restrictions on the price of the home being purchased and the income of participating homeowners.

“You owe it to yourself to put a little extra time into the process of finding homebuyer incentive programs that might apply to your circ*mstances,” says Bruce McClary, spokesman for the National Foundation for Credit Counseling, a Washington, D.C.-based nonprofit organization. “The best way to know more about the programs in your area and your chances of eligibility is to meet with a HUD-approved housing counselor. ”

Many of these programs were created in the 1980s to encourage homeownership within each state.

The New Jersey Housing and Mortgage Finance Agency, for example, has a down payment assistance program called DPA that provides first-time homebuyers with $10,000 toward their down payment and closing costs. The funding comes in the form of a five-year forgivable, interest-free second loan without a monthly payment. Consumers may participate in the program only if they qualify for a first mortgage—namely, a 30-year fixed-rate government-insured loan—with the state’s housing and mortgage finance agency. They also must meet household income and purchase price limits.

New Hampshire Housing offers a slightly different incentive called the Mortgage Credit Certificate program. This tax credit lasts as long as you live in the home and allows you to claim a tax credit for a portion of the mortgage interest you pay annually—up to $2,000 for the life of the original mortgage.

While there currently are no first-time federal homebuyer tax credits, potential buyers nationwide should consider another incentive, says Kimberly Dula, a managing partner at Friedman, a New York-based accounting company.

First-time homebuyers can withdraw up to $10,000 from an IRA at any age and avoid the 10% early withdrawal penalty for account holders younger than age 59 1/2. But taking money out of your retirement account has its drawbacks: You lose some compound interest, which grows your balance. Withdrawing money also could leave you with a lower amount to use once you retire.

President Biden Wants To Bring the First-Time Homebuyer Credit Back

President Joe Biden has proposed a maximum $15,000 tax credit for first-time homebuyers that would go toward down payments. A bill to implement the president’s plan was introduced in Congress in April 2021. As of the fall of 2022, the legislation had not seen any movement.

The previous federal program provided incentives after taxpayers filed their tax returns, while the Biden tax credit proposal is billed as providing an immediate form of down payment assistance that could be put to work when people close on a mortgage.

Tax credits can be more advantageous to consumers than tax deductions, since they’re a dollar-for-dollar reduction in tax liability as opposed to a reduction in taxable income, says Nell Curtis, an accounting instructor at Milwaukee Area Technical College in Wisconsin.

A massive tax overhaul that became law in late 2017 made itemizing deductions less common and limited itemized write-offs for state taxes to $10,000. Today, many homeowners see a much lower tax benefit from mortgage interest and real estate tax deductions than they previously got, she adds.

“Ultimately, a first-time homebuyer’s credit would be an improvement over the mortgage interest deduction for first-time buyers because it is much more likely that they will be able to utilize the benefit on their tax return,” Curtis says. “It also encourages the purchase of a home without necessarily requiring the homeowner to take on mortgage debt.”

The homebuyer credit being proposed by President Biden is actually more of an advance, Dula says.

“Rather than having to wait until you file your return to see the funds either through a refund or a lower tax liability, the funds would be advanced to the homebuyer at closing,” she says. “This is something that would certainly be helpful to anyone considering home ownership.

However, with the big demand for housing in some areas in the U.S., the supply of homes is at a minimum—and a homebuyer’s credit could contribute to the problem.

“Should this credit motivate more taxpayers to consider purchasing, this could cause housing prices to rise in areas where housing supply is already limited,” Dula says. “This is something that will most likely be discussed when President Biden is looking for support of the credit.”