State first-time home buyer tax credits

[Polly Lieberman]

First-time home buyer tax credits and incentives in the United States offer a variety of benefits to help make home ownership more affordable and accessible. Here are some key options available for first-time buyers:

1. Mortgage Interest Deduction
While not exclusively for first-time buyers, this federal tax benefit allows homeowners to deduct the interest paid on their mortgage, which can be substantial in the early years of the loan. Taxpayers who itemize deductions can potentially lower their taxable income.

2. First-Time Home Buyer Tax Credit Act (Proposed)
This proposed federal program would provide first-time homebuyers with a refundable tax credit up to $15,000 (or 10% of the home purchase price). While it has not yet been passed, it may be enacted in the future, making it worthwhile for prospective buyers to monitor its progress.

3. State-Level First-Time Home Buyer Credits and Grants
Many states offer programs for first-time buyers, such as grants or tax credits for purchasing homes. These vary by state and can range from flat-rate grants, low-interest loans, closing cost assistance, or tax credits for mortgage interest.

4. Down Payment Assistance Programs (DPAs)
Many state housing authorities and local governments offer DPAs, which can provide grants or low-interest loans to help with down payments and closing costs. Some DPAs may offer forgivable loans, meaning they don’t have to be repaid if the buyer stays in the home for a certain number of years.

5. Mortgage Credit Certificate (MCC) Programs
An MCC allows first-time homebuyers to claim a tax credit of up to 20-30% of their mortgage interest (up to $2,000 per year). This credit is available for the life of the loan and can significantly reduce federal tax liability. Requirements and availability vary by state, as some states administer the MCC program while others do not.

6. IRA Penalty-Free Withdrawal
First-time homebuyers can withdraw up to $10,000 from an Individual Retirement Account (IRA) penalty-free to use toward their home purchase. This withdrawal will still be subject to income tax but avoids the usual early withdrawal penalty.

7. FHA Loans with Down Payment Assistance Options
The Federal Housing Administration (FHA) provides loans with down payment requirements as low as 3.5% for first-time buyers with good credit. FHA-approved lenders often offer additional down payment assistance programs, making it easier to qualify.

8. Federal Housing Administration (FHA) and USDA Loans
While not tax credits, these loan programs can be beneficial for first-time buyers, as they typically require lower down payments and have more lenient credit requirements.
USDA loans are also available for low- to moderate-income buyers in eligible rural areas and do not require a down payment.

It’s a good idea to talk to a tax advisor, as these credits and incentives vary by location, income, and other qualifying factors. Also, monitoring legislation, particularly regarding federal incentives, can be helpful as new programs are proposed frequently.