First-Time Buyer Homeowner Assistance
Candidate Joe Biden wanted more Americans to participate in homeownership. He’s president now, and his colleagues in Congress are beginning to move that initiative forward. Biden campaigned on $15,000 in assistance to first-time buyers, and last month lawmakers in Washington introduced two bills that would make good on that promise, one of which includes as much as $25,000 for down payment help.
The housing market is red hot, but if you don’t have the resources to make a down payment, being a part of it may not be possible. Saving enough for a 20% down payment is unattainable for most families. Fortunately, there are government loan programs like FHA, VA, and USDA that permit qualified buyers to purchase homes with as little as 3.5% down. However, it can take years to save even that. The government would like to help.
$15,000 Tax Credit
One of the proposed bills introduced involves your income taxes, so yes, it’s more complicated. The tax credit is meant to assist homebuyers whose income is less than 160% of the median household income where you are buying. The tax credit’s defined “first-time buyer” loosely includes anyone who hasn’t owned or purchased a home within the last three years.
Additionally, your area’s median home price is a factor. The proposed maximum purchase price is 110% of said medium home price, which due to the previously mentioned scorching housing market, may be more difficult than it sounds. If you meet the income threshold and can find a home that falls within the median guideline, the tax credit for which you may be eligible would equal 10% of your home’s purchase price, maxing out at $15,000.
The proposed tax credit is not a tax deduction, which means the $15,000 is subtracted from the tax you owe, not your taxable income. It would also be refundable, meaning if your taxes are $10,000 and you qualify for the full $15,000 credit, the remaining $5,000 would be paid to you in your tax refund.
If you’re a potential first-time buyer, this probably sounds great. However, you may have picked up on the fact that this bill only really benefits homebuyers who can already make a down payment. The benefit kicks in when you do your taxes the year following your home’s purchase. If you are struggling to save or don’t have the fortune of having a family member help with your down payment, the second of the two proposed bills may be of greater interest.
Up to $25,000 in Down Payment Assistance
The Down Payment Toward Equity Act of 2021 would provide cash assistance to pay your down payment and/or closing costs. This proposal would benefit first-time buyers and anyone whose home was lost to foreclosure or financial hardship who meet certain income guidelines. The current proposal would provide up to $25,000 depending on the social and/or economic qualifications of the homebuyer.
The cash received from the program would not have to be paid back as long as the purchaser lives in the home for five years. 20% of the amount received is forgiven each year prior to reaching year five. Since the funds received are in the form of a down payment, repaying any portion due prior to the five year deadline would come out of the sale proceeds as long as property values remain constant.
Effect on Housing Prices
Despite shuttered businesses, cut hours, layoffs, unemployment, and a global pandemic, housing has boomed over the last year. Booming home prices have made it more difficult for lower and moderate income families to escape renting. Critics of the proposed legislation, designed to alleviate the down payment obstacle, believe the effect on home prices, should either of them pass, would exacerbate the problem.
While the $15,000 tax credit may make some future homebuyers who have adequate down payments make the plunge sooner than they may have otherwise, the impact on demand for housing could be minimal. However, the $25,000 down payment bill could add millions of potential buyers to a market where demand already far outweighs supply. Home prices, especially those in the first-time homebuyer price range, could balloon even further.
Interest rates are still historically low, and experts don’t anticipate that changing anytime soon. Low rate environments lead to home appreciation without the influx of millions of potential homebuyers. If these bills pass and interest rates eventually creep up, what happens to home prices when the programs expire? Any increase in home values caused by passage of either of the two bills will likely see the opposite effect after they’ve expired.