First-Time Home Buyers Get $8,000 Tax Credit

Home Buying News - February 22, 2009 -- As part of President Obama's housing stimulus plan, first-time home buyers in 2009 who meet certain conditions could get an $8,000 tax credit after purchasing.

Back in November, we explained the $7,500 tax credit that was being offered to certain first-time home buyers. But this stimulus item was often criticized for one specific item. It had to be paid back. So instead of being a true credit, the $7,500 was more like a 15-year interest free loan.

Ever since then, various real estate organizations have been lobbying the federal government for a stronger tax credit plan (i.e., one that did not have to be paid back). These organizations recently got their wish. Under the new stimulus plan recently announced, first-time home buyers who meet certain conditions could qualify for an $8,000 tax credit. And unlike the previous credit, home buyers do not need to pay this one back.

$8,000 Tax Credit - Fact vs. Myth

But the new $8,000 tax credit has also created a lot of confusion and rumors. For example, I recently spoke to a friend on the phone who said that anyone buying a home in 2009 would "receive a check from President Obama for eight grand, with one week of buying." This is what happens when rumors run wild.

So, in the interest of spreading the facts and squelching the rumors, I've created list of frequently asked questions regarding the $8,000 tax credit for first-time buyers.

1. Who qualifies for the credit?

Within the context of this program, a first-time buyer is defined as anyone who has not owned a home (primary residence) for the last three years. So, if you've owner a home in the past, but you've been living in an apartment for more than three years, you are considered a first-time buyer under this program. To qualify for the tax credit, you must also purchase (or have purchased) a home between January 1 and November 30, 2009.

2. How much is the tax credit?

This credit is worth $8,000 or 10% of the current appraised value of the home, whichever is less. So if the home is worth $60,000, for example, you would get a tax credit of around $6,000 (10% of the home's value). If the home was worth more than $80,000, your tax credit would be capped at the $8,000 level. In other words, the vast majority of first-time buyers will qualify for the full $8,000 credit, since the majority of homes are worth more than 80K.

3. Do I have to pay it back?

If you stay in the home for at least three years, you do not have to pay it back. However, if you sell the home before three years, you'll be obligated to pay back the credited amount.

Other Hurdles to Home Buying Remain

This tax credit is certainly a step in the right direction. But the two biggest obstacles for home buyers still remain. Most mortgage lenders today are requiring a 20% down payment in order to qualify for a home loan. Likewise, credit score requirements are higher today than two years ago. These two factors have led to a reduction in the number of qualified home buyers in the market right now.

But before you complain about these obstacles, consider the following. The days of "easy lending" (during which nearly everyone qualified for a home loan in some way) had a lot to do with the mess we are in right now. You remember the subprime mortgage boom, right? That was when you saw advertisements that said things like "No money down, bad credit okay!" This type of lending practice is dangerous, and more than any other single factor it is responsible for the economic mess we are in right now. Certain hurdles to home buying are a good thing.

So while the $8,000 tax credit for first-time home buyers will motivate many people, you still need to be a well qualified borrower in order to get a loan. You need to have a good credit score, a favorable debt-to-income ratio, and a sufficient down payment. If you plan to buy a home in 2009 or 2010, focus on these three things above all else.