There are many things to consider when buying your first home. Having enough money saved for a down payment, searching for the right home, and building your credit is just the tip of the iceberg. Having enough money to afford your house is arguably the most stressful factor. Luckily there are many programs, tax credits, and other incentives that are geared towards first-time home buyers and make the process easier.
First-time home buyers have been defined by the U.S. Department of Housing and Urban Development as an individual who meets one of five possible conditions:
- Individuals who haven’t owned a principal residence in over three years.
- A homemaker who is displaced and has owned a house only with a spouse.
- A single parent who has owned one home previously with they were married to a former spouse.
- Individuals who have owned property which was not compliant with building codes and can’t be compliant without the need to build a new permanent structure. They can’t have owned compliant property in the past.
- Individuals who owned a principal residence that hasn’t been attached permanently to a foundation.
When you qualify for one of these conditions, you have the options below to help you with purchasing a new home.
The Difference Between a Tax Credit and Tax Deduction
It’s essential to understand what the difference is between a tax credit and a tax deduction when buying a home. Tax deductions will reduce your taxable income, though the tax reduction that you will experience will depend on where you are in the tax bracket. The tax credit, on the other hand, will reduce the taxes you owe, dollar for dollar. Tax credits will save you more money than a tax deduction.
For instance, if you receive a tax credit of $1,000, your tax obligation will also reduce by $1,000. In the case of a tax deduction, a $1,000 decrease may reduce your taxes by $250 if you are in the 25% tax bracket.
First-Time Home Buyer Benefits
There are several different benefits that you could look into when you are a first-time homebuyer. Here are some that you should consider:
- IRA withdrawal. During your lifetime, you are allowed to take out $10,000 from your traditional or Roth IRA without paying the early withdrawal penalty of 10%. There is a different definition that the federal government defines for a first-time home buyer. They consider it someone who in the last three years hasn’t owned a personal residence.
- Housing and Urban Department. The best place to look for grant assistance is through the HUD. This government organization will match you with other organizations that provide grants to first-time homebuyers.
- Size Up State Programs. Several states have programs that help assist first-time home buyers with down payment assistance. These programs are generally based on income eligibility, and there might be other limits set, such as the cost of the property. Down payment, closing costs, and renovation costs could be part of the financial assistance that a borrower could obtain.
Other Tax Benefits
Some tax benefits apply to all homebuyers as well that you should be eligible for as a first-time home buyer. The home mortgage interest deduction will allow you to deduct the interest that you are paying on your mortgage. If you paid points or a loan origination fee for your mortgage, you could also apply those as deductions. State and local property taxes are other deductions that you make on your income taxes. If you have installed solar panels, wind turbines, or other energy efficiency unions, they could be worth up to a 30% tax credit.*
Ready to buy your first home? NASB is here to help you get the keys to your new home. Give us a call at 844-334-4739.
* NASB does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.