Biden’s first-time homebuyer tax credit heads to Congress

Aly J. Yale
The Mortgage Reports contributor

$15,000 tax credit included in the First-time Homebuyer Act

President Joe Biden touted a potential first-time homebuyer credit on the campaign trail, and now, it seems Congress has delivered. 

On Monday, Rep. Earl Blumenauer (D-OR) and Rep. Jimmy Panetta (D-CA) announced their sponsorship of a new bill dubbed the First-time Homebuyer Act. In its current form, the bill would offer a tax credit for first-time buyers of up to $15,000.

Eligibility would come down to income level, home price, and other factors, but unlike the home buyer grant introduced last week, it would not be reserved for first-generation buyers — just those who haven’t owned a home in the last three years.

The bill has not yet passed, but here’s what you should know about the initial proposal and what it would mean for home buyers if it becomes law.

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How does a home buyer tax credit work? 

Unlike a deduction, which lowers your taxable income, a tax credit directly reduces your actual tax bill. So if you owed $20,000 in income taxes and were to claim the first-time buyer tax credit in full, you’d owe just $5,000 for that year’s federal taxes ($20,000 minus $15,000).

The biggest perk of the homebuyer tax credit is that it’s refundable — meaning it can increase your annual tax refund.

For example, if you owed $8,000 in taxes and claimed the $15,000 credit, you’d be able to get that $7,000 difference as a refund once you filed your returns. 

This measure — if passed — could put cash directly back into home buyers’ pockets. Few other first-time home buyer programs are so generous.

Keep in mind that the credit could only be claimed for the year you bought the house. So if you buy a home in 2021, you’d claim it on next year’s filings — the ones you submit by April 15, 2022 (not the ones being filed right now.) 

How would Biden’s tax credit help buyers?

If the act passes, first-time buyers of all backgrounds could claim a one-time tax credit worth 10% of their home’s purchase price, up to $15,000. According to the bill’s current text, homes purchased after December 31, 2020 could qualify.

The bill’s sponsors say it’s an effort to reduce the barriers to homeownership — particularly in the face of rising home prices, which are now up a whopping 12% over the year.

A first-time home buyer tax credit could help improve affordability in the face of rising home prices, which are up 12 percent over the year.

Blumenauer called the credit an “incentive” saying, “As housing prices and demand continue to rise to historic levels, we need to do more to create opportunities for those who’ve been locked out of homeownership.”

The act could also help make homeownership more attainable for minority communities.

The homeownership rate among Black and LatinX communities is currently 20% lower than that of white Americans, and for Asian Americans and Pacific Islanders, it’s 10% lower.

“The homeownership gap especially impacts families of color who, for too long, have been disproportionately deprived of building wealth through homeownership,” Panetta said.

“Families need help purchasing their first home so they can fully achieve the American dream.”

Requirements for the first-time homebuyer tax credit

Eligibility for the first-time homebuyer tax credit would be based on past homeownership status and household income.

Buyers could not have owned a home in the last three years, and their Modified Adjusted Gross Income would need to be 160% or less than the area’s median income. Additionally, the home’s purchase price must be 110% or less than the local median.

Buyers would not need to repay the funds (as they have in previous versions of the first-time buyer credit), but they would need to keep the home as their primary residence for at least four years. Selling the home in that timeframe would mean paying back a portion of the credit.

What about Biden’s $25,000 home buyer grant? 

The First-time Homebuyer Act isn’t the only housing-related bill moving through Congress right now. Just last week, lawmakers introduced a draft of the Downpayment Toward Equity Act of 2021, and though it aims to help Americans overcome similar housing challenges, the workings of that measure are quite different.

For one, the Downpayment Act is a home buyer grant. It offers $25,000 — upfront and at closing — to use toward the down payment on their first home. The funds are not a loan, do not accrue interest, and do not need to be repaid at any point.

This is similar to existing down payment assistance (DPA) programs, although few offer grants as large as $25,000.

Rep. Blumenauer (D-OR) has hinted that there may room for both measures under the Biden administration.

The proposed grant program also has tighter requirements. To be eligible, buyers couldn’t make more than 120% of the local median income (compared to 160% on the other bill).

Grant recipients also couldn’t have owned a home in the last three years and — this one’s important — they need to be a first-generation buyer. That means their parents (or the parents of any co-buyers) cannot have owned a home before.

All in all, the bill is an even more concerted effort to help marginalized communities buy a home, and Blumenauer himself has hinted that there may room for both measures under the Biden administration.

“[The First-time Homebuyer Act] is just one element of the big, bold housing agenda that we are promoting to combat the housing affordability crisis and address centuries of overtly racist and discriminatory housing policies that have left massive wealth, homeownership, and opportunity gaps between white communities and communities of color,” he said. 

What’s the timeline for these measures passing? 

Both bills are currently in the draft stage, so they’ll still need to officially be introduced on the House floor. They would then go to a committee, as well as various hearings and reviews, then finally, there’d be mark-ups and revisions before going in front of the full chamber for a vote.

If those steps go successfully, the bills would head to the Senate and then eventually President Biden’s desk to be signed into law.

Experts have hinted that if this latest bill is included in the infrastructure package that’s currently moving through Congress, passage could be on the quicker end. There’s no indication that this is the works just yet, but with Biden himself saying “housing is infrastructure,” it wouldn’t be too big a surprise — especially for the bill that so closely mirrors what he campaigned on.

Still, only time will tell. The only thing certain now is that lawmakers — as well as the new administration — have housing reform in their sights. 

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