The First Time Home Buyer Credit: How Big of a Deal Is It?

By Carlos Portocarrero on 25 February 2010 (Updated 6 July 2012) 36 comments
Photo: USDAgov

After two years, over 80 viewings, and almost breaking up with our broker, we finally bought our first place.

It's been a saga but we finally got it done. And as someone who has been looking for this long, I can tell you that we were pressured every step of the way to just buy something — anything — because it was the "perfect" time to buy. This had to do with prices coming down and rates being low. (See also: 6 Basic Tips for Buying a Bank-Owned Home)

But the best reason to buy was always Obama's first-time home-buyer's credit. It would give us $8,000 in cash to do whatever we pleased after we closed on the home. This deal was the greatest thing since the Snuggie and we would be stupid not to take advantage of it.

When the credit was set to expire at the end of November of last year, we felt the pressure from our broker: we were about to lose out on the best time ever to buy a first place. But as Wise Bread readers know, we didn't have the money back then.

Using the Credit as a Down Payment

Not all home buyers use the credit the same way. Some of them save it, some of them spend it on furniture for the new place, and others use it as a down payment towards the very house they're buying in order to get the credit.

That's right: in some mortgages you can use the credit as part of your down payment and put it towards the house. This seems kind of fishy to me because you don't even have the money yet — but if you're really strapped for cash and this is the only way you can put money down or cover closing costs, then by all means do what you have to do.

But if you're in that bad a shape, maybe you shouldn't be buying a house to begin with.

Fixing Up the Place

The other option is to use the new found cash to furnish your place, paint, etc. Starting anew is exciting and giving the place a personal touch is part of the dream of owning a home. After all, you just put a lot of money into the place and you're probably feeling a little light on funds. So having some found cash makes it easy to go out and spend even more on it.

Isn't that the American way?

Building Your Savings Back Up

This is what we're going to do. We spent years saving as much money as we possibly could and now we're seeing most of that hard-saved money disappear as our down payment. Poof — gone. Just like that.

The best part of having a large amount of cash sitting in an FDIC-insured account is peace of mind. And not have that money there anymore is very tough psychologically — the cushion is not nearly as big as it once was.

What does that mean? It means that the idea of one of us getting fired from our jobs was a trivial thing. Both of us losing our jobs at the same time? Eh...we were covered.

But now we have a mortgage to pay and the majority of our savings is gone. We still have an emergency fund, but if either of us lost our jobs we'd feel very stressed. We feel stressed already!

And this is where the $8,000 tax credit is a boon to us — it's going right back into our savings account to help build it back up to what it was.

Yes, It's a HUGE Deal

For us, the tax credit gives us the greatest thing money can buy: peace of mind. Without it, we'd probably still be buying this place, but we would also be more stressed out and statistically more likely to default on our mortgage. So for that I say Thank You to the Obama administration. I don't know if it'll help the economy out of its doldrums, but it's definitely helping me and my wife.

I'm curious to hear from other people who have qualified for this or other home-buying tax credits recently and how they played a role in their purchase.

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Guest's picture
andyg8180

sucks when you buy a house one year before they say "hey heres free money" I would have loved to take advantage of this...Since they seem to have extended the program and opened it up to others, ive contemplated selling my place and getting in on this deal...

Guest's picture

I have a hard time with this - depending on your house, your mortgage (with interest) will cost $300,000-$400,000. So essentially you're spending $300K to get $8,000? Is that a great reason to rush out and buy a house?

If you're already buying a house, that's great and you should definitely take advantage of the credit. But writing articles that promote the credit are going to inspire a lot of people to rush out and get houses before they are financially ready to - and we all know plenty of people are doing that already without the encouragement!

It's not a bad article - and I'm happy for you by the way! - but for skimmers, there are no caveats in the bolded sections, which there absolutely should be.

Guest's picture
Olivia

I think you and Questionable Logic hit the nail on the head: this credit is great if you have the money and are already in the market for a new house. It is NOT a reason to go out and buy a house you would not have bought otherwise. If you cannot afford the down payment on your own, that is probably a good sign that this house is not the house for you. This credit is nice, but it should not be the reason for going and spending this sort of money.

Guest's picture
ClaireGuest

I bought a house last fall and qualified for the $8,000. One of the frequently overlooked caveats is that if you move within 36 months, you owe the entire $8,000 back to the IRS!

I just can't justify spending it on new living room furniture knowing that if I needed to move for whatever reason within those three years I'd have to come up with $8,000 at tax time. I can't see my house appreciating enough in order to recoup the tax credit plus other seller's costs (real estate commissions, recording taxes in my state, etc. plus any concessions I'd be required to make).

Maybe my situation is individualized because of the low value of my house, but it's certainly an exercise people should go through before they spring for the fancy leather sofa.

Guest's picture
Guest

all this credit does is continue a path of welfare for all (which really is a giant ponzi scheme, sooner or later you run out of taxpayers to pay in) people who really need a place to stay cannot afford a house to get this credit, the people who are getting it are laughing all the way to the bank knowing that other taxpayers are paying for thier down payment. the author here says they paid the down payment out of savings and will now replenish those savings, but they tsk tsk those who just apply it directly. ouch. better than them , eh/

Guest's picture
Elizabeth

Yes, if you move within 36 months you will owe the money back but it is paid back bits at a time through taxes. This stimulus is not new to the Obama administration. There was a 7500 refund for first time homebuyers the year before but you had to pay it back in taxes over the next (I think) 15 years. I believe this is how you have to pay it back if you move.

Having bought a house last year and received the money, I was thankful for it but had a hard time deciding if I really wanted it. What I didn't want free money?!?! No, I don't like that there is no provision to replace the money as before. Having bought a brand new house, it was great to have the money for things like a yard, blinds, and all the little stuff that adds up. However, we both feel that the downsize is the massive burden to the taxpayer that is being created in Washington. And, we are taxpayers but I would feel better if they still had a provision to pay it back.

Guest's picture
Guest

How long did it take you to get this free money.

Guest's picture
Elizabeth

Yes, if you move within 36 months you will owe the money back but it is paid back bits at a time through taxes. This stimulus is not new to the Obama administration. There was a 7500 refund for first time homebuyers the year before but you had to pay it back in taxes over the next (I think) 15 years. I believe this is how you have to pay it back if you move.

Having bought a house last year and received the money, I was thankful for it but had a hard time deciding if I really wanted it. What I didn't want free money?!?! No, I don't like that there is no provision to replace the money as before. Having bought a brand new house, it was great to have the money for things like a yard, blinds, and all the little stuff that adds up. However, we both feel that the downsize is the massive burden to the taxpayer that is being created in Washington. And, we are taxpayers but I would feel better if they still had a provision to pay it back.

Xin Lu's picture
Xin Lu

I think the key in this article is that WC said they would buy the place with or without the credit, so the credit is really just bonus free money.  It's definitely a nice perk I guess, but I don't know if it's a huge deal in the grand scheme of things. 

Guest's picture
Guest

On behalf of the taxpayers, you are welcome. Thanks to big O for extracting more from the prudent.

Guest's picture
tt

I was told by my tax preparer that this was essentially a loan and had to be paid back to the government later (I'm not sure what the fine print was, either low interest or interest-free loan). So he suggested we were better off not utilizing the tax credit. Was he right or is it time to look for a new tax preparer?

Guest's picture
Guest

The $8000 first time homebuyers credit is free money NOT a loan. Go for it! No one in their right mind should refuse this, if you're worried about moving - either rent the house or bank the cash just in case.

Guest's picture
JT

#8

I'm not sure if your wording was intentional or not, but please don't call it "free" money. There is no such thing as a free lunch; a cost is always there, whether it's obvious or not.

#9

You can thank Bush and the Republicans as well; the fiscal and monetary irresponsibility is not just limited to the Democrats.

#10

Your tax-preparer was correct at one point because several years ago a housing credit existed which had to be paid back. The newer version does not though. He may not have been informed of the change, although I would think it's common knowledge by now.

My thoughts on the housing credit is that it's a huge waste of money that only helps those who were already going to buy anyway. You can't stimulate forever and when the music stops someone is going to be left without a seat.

The only thing the credit accomplished was pulling forward demand; those who were planning on buy in 1-2 years moved up their purchase to get the credit. This is only going to leave an absence of demand after the credit runs out.

I have personally been waiting for this credit to end before I even begin to consider purchasing a house. The next major obstacle is getting prices to reflect the massive amount of shadow inventory that exists. Banks have been playing extend and pretend with delinquent and defaulting mortgages, refusing to send NODs and proceed with foreclosure. As the shadow inventory makes its way onto the market, housing prices will be under further depreciation.

All these things are good for those who have patience and do their homework as they will end up paying far less than their neighbors.

Guest's picture

It's like nice icing on cake if you are already buying the house then but it's not an incentive to buy if you are not ready for it.

Guest's picture
megan

We're planning to use our credit for more tax break purchases - new windows, insulation, etc. that we can deduct on our taxes next year.

Guest's picture
Croatian1

Make sure you really check all the fine print on the so called tax breaks on windows, etc. Hubby and I checked out the window situation. Here in MN the window have to be at least a 4 therm pane, under the "plan" they only cover up to 3 therm, which means the State of MN and the upper midwest does not qualify for this one. Many window companies here were really pushing it. I questioned several it was not until I stated about the therms that they admitted MN does not qualify. Unfortunately people did not find this out until they had their work complete. So, really check with your State because so many companies do not care that they are doing work for you that they know does not qualify for the tax rebates. Also these tax rebates are spread out over a couple years so you cannot take it as one lump write-off.

Guest's picture
Candice

To continue this topic further, we bought a foreclosure in November and immediately replaced the original (1905) windows with energy efficient windows. Obviously, we were going to do this either way, but it was a surprise to us when we found out we didn't qualify for the 30% -up-to-$1500 credit for installing them, because we were getting a refund already. Apparently, you have to be paying in the money first, or you don't get it at all. This hasn't always been the case with other credits - we get a refund because of the child tax credits and our lower end income.

We've owned our home since 1999, but because we only lived in the last house for 3 years, we didn't qualify for the tax credit for repurchasers. We did, however, live in the house before that for almost 6 years. We only moved from the last house because of a cross-country job move.

While I agree the homebuyer credit would be nice if you were already planning the purchase, it's just another example of what previous posters said - money out of the tax payer's pocket. To the poster who said we could blame Bush and the republicans for the fiscal irresponsibility, I say the government in general is to blame. This isn't a partisan issue, overspending, and to make it such would be silly. However, it *is* a fact that this current administration has spent and spent and spent in this first year, and mostly on "incentives" and "credits" and other such that really haven't helped our economy at all. History has shown us that the presidents that helped turn the economy were those that tightened the belt of the gov't, not the ones that put us into debt.

Since when do we actually believe that to be fiscally sound, you must go into debt?

Carlos Portocarrero's picture

To clarify: we were already going to buy. I thought I made it clear that I thought it was disingenuous of our broker to attempt to pressure us with the carrot of $8k back. I've done the math on how 8k compares to the total you'll spend on the mortgage and it doesn't compare.

It's a joke to think that 8k would be the main reason for someone to buy.  

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Guest's picture
Linda R.

I recently helped my 23 yr old stepson buy his first house mainly because of the credit. The house cost $79,000 so he only got $7,900 but that 10% contribution by Uncle Sam sure helps toward paying this year's real estate taxes, his homeowners insurance policy, and several months of utility costs. I am now considering trading up to another home myself, since now "long-term owners" that have lived in their house 5 of the last 8 years can get a homebuyer tax credit of $6,500 if you sign a contract by 4/30/10 and settle by 6/30/10.

Guest's picture
Croatian1

I just have to ask, if your stepson has to use the $7900 towards this years property taxes and ins. how is he going to pay those next year?? Why did he not have those 2 items put into his mortgage payment. This is what hurt the housing market this last time, people buying homes they could not afford to pay on.

Guest's picture
Linda R.

To answer about why the property tax and insurance aren't in the mortgage payment, my stepson has no monthly payment because he paid cash for a foreclosure home. He had been stationed in Iraq as active duty military last year and when he came home he used his year's pay and bonus to buy the house since he was able to bank all his pay while overseas. But I agree, if you can't afford to pay a big mortgage or all the extra costs of owning a home, don't buy just because of the credit.

Guest's picture
pete

WC isn't that $8000 going to be used on moving expenses and buying furniture or fixing up your new house? You will not likely keep it in the end.

Guest's picture
pete

WC isn't that $8000 going to be used on moving expenses and buying furniture or fixing up your new house? You will not likely keep it in the end.

Carlos Portocarrero's picture

Pete: Nope. I have the funds for all of that, what it will do is help replenish the emergency fund. Or, to be more specific, make our cushion more comfortable.

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Guest's picture
catastrophegirl

i was in the market anyway but the tax credit helped me buy a house that i would have been hesitant to buy otherwise. i fell in love with the house, the location and the price itself was great ... but the roof is coming up on 19 years old. there were some structural problems on one end that the sellers repaired as part of the sale but the rest of it needs new shingles this year. fortunately, knowing that the roof is sound for now and i'll have the money to reshingle before it becomes an issue i was able to get the house i love

Guest's picture
finally a homeowner

Hello. I am 29 and have been saving for a home for ýears. I live in SoCal where the prices are outrageous, but the prices have declined about 50 percent from where they were 5 years ago. I knew I wanted to buy a home before the prices began to creep up again, and the 8k tax credit was a serious motivator for me. I found my dream house (which was listed for 400k in 2007) in foreclosure and bought it for just 175K. I had the seller (bank) pay my closing costs and fannie mae only required I put down 3 percent. All in all I forked out about 8K as my down payment which, and this is important, I COULD HAVE AFFORDED WITH OR WITHOUT THE TAX CREDIT. However, my leftover "emergency cushion" would have been about 10k, but thanks to Obama administration, it will be 18k - exactly what it was before I bought the house. The tax credit definitely gave me a push and incentive to buy. But if I hadn't had the savings before as described above, it never would have happened. I've noticed as I read the blogs that the people who don't qualify for the credit are all against it. But I probably would have delayed buying a place to increase my savings more. At a time where prices are showing slight signs of stabilization and even increases in some areas, the home prices would have probably been out of reach again by the time I saved another 8k.I am sorry for those folks who do not qualify, but sometimes robin hood has to take from the rich and give to the poor.

Guest's picture
finally a homeowner

Hello. I am 29 and have been saving for a home for ýears. I live in SoCal where the prices are outrageous, but the prices have declined about 50 percent from where they were 5 years ago. I knew I wanted to buy a home before the prices began to creep up again, and the 8k tax credit was a serious motivator for me. I found my dream house (which was listed for 400k in 2007) in foreclosure and bought it for just 175K. I had the seller (bank) pay my closing costs and fannie mae only required I put down 3 percent. All in all I forked out about 8K as my down payment which, and this is important, I COULD HAVE AFFORDED WITH OR WITHOUT THE TAX CREDIT. However, my leftover "emergency cushion" would have been about 10k, but thanks to Obama administration, it will be 18k - exactly what it was before I bought the house. The tax credit definitely gave me a push and incentive to buy. But if I hadn't had the savings before as described above, it never would have happened. I've noticed as I read the blogs that the people who don't qualify for the credit are all against it. But I probably would have delayed buying a place to increase my savings more. At a time where prices are showing slight signs of stabilization and even increases in some areas, the home prices would have probably been out of reach again by the time I saved another 8k.I am sorry for those folks who do not qualify, but sometimes robin hood has to take from the rich and give to the poor.

Guest's picture
Silem23

My husband and I had saved money for a small downpayment for an FHA loan and closing costs, but were worried about depleting our savings account completely.

We finally found the right place and closed on our new home last month. The 8,000 credit made this a more secure feeling purchase for us. Before, we would have wiped out our savings to get into the house, and then been sitting on nothing should we have an emergency, or need things for our new home. The tax credit gave us the incentive to buy and to be more aggressive in our house hunting.

Now we have $8,000 sitting in the bank that we can use for things we need for our new home, or just use to start our nest egg all over again. I am thankful that this program was available and that we were able to take advantage of it.

I also have friends who used the money toward their closing cost, it made their home purchase more of a reality, as they were still about $5,000 short of the approximately $13K they needed for closing, even though they were confident they could make the mortgage payment monthly, as that was already their rent payment.

I hope more young families like ours are able to take advantage of it and also purchase their first home. Sitting on our porch over the weekend and knowing that the home is "ours" was the greatest feeling in the world!

Guest's picture
4506 t

The free money for purchasing a house is wonderful if you're in the market for one. I'm looking to buy one at the moment, I just have to have my income verified for the bank. I found out I have to get a get a (4506 t form) verification done before I can purchase but I think everything will be fine and I will be able to sign the mortgage documents soon.

Guest's picture
Guest

Don't get your hopes up with this free money.  I know someone who is still waiting on their check and it's very overdue.  Not only have they not recieved their "free money", but IRS is also holding their income tax check as well.  I could understand it if they owed back taxes but that's not the case. 

Guest's picture
Guest

I'm not impressed with the $8000 first time home owner plan.  My son who quilified for the $8000 sent his income tax off in early February.  To date, April 27 he has not recieved a dime!!!  Not even the income tax he would have gotten back without the $8000 incentive.  IRS is holding everything up.  He owes no back taxes anywhere, but because he has this $8000 coming back to him, they're sitting on every dime owed him.  First he was told he would recieve his check by April 13.  April 12 he gets a letter from IRS requesting more information.  Now they're saying he should get his check back by June 1st.  I'm not impressed with A THING OBAMA HAS DONE!!!!  I don't know why IRS can't at the very least send him the income tax money owed him while the nitwits iron out whatever details they need to with the $8000 first time home owner incentive.  Quite frankly, I think we have a bunch of chickens with their heads cut off workint the system.  I won't be putting myself out there for ANY Obama incentives.  I don't trust the man.

Carlos Portocarrero's picture

For the record, I mailed in my paper return around April 2 and had the funds deposited into my account on Friday of last week. That's less than a month to process a paper return and get the money into my account. 

I've heard of other people having to wait a long time for this, but I'm not one of them.

Carlos Portocarrero's picture

One other thing: feel free to debate the merits of whether or not the credit was good idea or not.

Guest's picture
Amanda

I think the tax credit is a wonderful thing, myself being a new home owner. While I was not a fan of the existing kitchen in my new home, when I purchased it, I knew I would use that $8,000 to renovate it to my likings. I unfortunately have made the mistake of starting said renovation, (near completion) assuming my money was on it's way. I filed January 30th, and today May 17th still no refund and the IRS reps can not tell me when it will be finished "processing". They said that there are a lot of fraudulent claims coming in which is slowing down the process for everyone. I'd certainly say that 4 months is slow! Well I'm lucky that my parents are graciously loaning me the money for a lot of the cash expenses, such as the contractor, however the interest building up on my credit cards isn't cute! Hoping the IRS can get things going soon!

Guest's picture
Guest

my wife and i closed on our house june 2009. we applied for the credit july 2009. here we are may 2010 and we still haven't received the money. in late february after going back and forth with the IRS they finally approved us for the $8,000 credit BUT now they were auditing us and claiming we owed them money and they were going to take it from the credit. after disputing that and sending in more info we received a letter in april 2010 stating our case has been closed and we have been denied the money completely.

IF THE OBAMA ADMINISTRATION WANT TO PUT A NICE TAX GENTURE OUT THERE TO THE PEOPLE THEY NEED TO KEEP A CLOSE EYE ON THINGS CAUSE THE IRS IS TRYING TO KEEP MY MONEY FOR BUYING A HOUSE.

all they can tell me is take it to court. WHY SHOULD I HAVE TO TAKE THIS TO COURT WHEN I BOUGHT MY FIRST HOUSE AND I SHOW PROOF AND I GET DENIED.

I WANT MY MONEY THAT IS OWED TO ME.....

Guest's picture
Renee

Now that the tax credit is over, do people out there think it's still a good time to buy? After all, mortgage interest rates are at an all-time low. I was reading this article about whether or not people should buy now that the bonus expired-- some pretty great insight here. I found it on the Equifax Personal Finance Blog: http://bit.ly/axxTvb