Contributing Writer at Tally
April 6, 2021
Congress just put the finishing touches on its $1.9 trillion COVID-19 stimulus plan, which netted eligible individual taxpayers up to $1,400 each. Now it’s turning the focus on homeownership in America by considering up to a $15,000 first-time homebuyer assistance tax credit in future tax and economic stimulus legislation.
While there is no official vote pending and the proposal is still in its early phases, its impact could be massive. Here’s what you can expect from it and other key details surrounding a potential homebuyer credit.
According to Zillow, 9.3 million renters (27.4%) in the U.S. could theoretically afford to own a home in their nearest metro area. This assumes they take out a 30-year mortgage at 3% interest, pay at least a 3.5% down payment, and spend no more than a third of their income on their mortgage.
This number is even larger in more affordable metro areas. For example, 40.5% of renters in Pittsburgh, Pennsylvania; 39.7% of renters in Cincinnati, Ohio; and 39% of renters in Cleveland, Ohio might be able to get a 30-year, 3.5% interest mortgage in their area without the payment exceeding 30% of their monthly income.
The biggest issue blocking these potential homeowners is the 3.5% down payment. Moody’s Analytics found that renters save an average of 2.4% of their income, which is about $440 per year. To reach that $15,000 mark, which is enough to put a 3.5% down payment on a home costing about $428,000, it would take over 34 years — yes, years.
Renters concur, as 63% of them in major metropolitan areas cite saving the down payment as their biggest struggle in buying a house.
This $15,000 credit might possibly immediately thrust millions of homeowners into a financial space where they could pull off that massive down payment without enduring financial strain.
There are plenty of tax credits out there, including those for solar panels and electric vehicles. While these are great for making green technology more affordable, the big issue is they don’t help at the time of purchase. Instead, they are refundable at tax time.
That wouldn’t be the case under President Biden’s plan. Instead, this tax credit would be refundable and immediately advanceable. So you could get the cash when you’re buying your home instead of having to wait for the refund after filing your taxes.
An advanceable credit helps in two ways. First, it gives buyers the chance to shop at their leisure and not rush to find the perfect house before the year ends. Second, it eliminates a sudden surge in homebuying demand at the end of the year, which tends to put more strain on an already-stretched-thin home inventory.
Various local governments also offer special assistance for first-time homebuyers, ranging from 0% loans to forgivable grants. This federal program likely wouldn’t impact any of these local assistance initiatives.
In theory, first-time homebuyers could combine these assistance programs and further improve their budgets or lower their payments with larger down payments.
We’ll continue to keep you updated on these developments as they unfold. In the meantime, one of the best ways of planning for homeownership is to keep your debt in check. Check out Tally today for efficient and effective ways to do just that.