First-Time Homebuyer Credit- Credit or Interest Free Loan?

by Broke Professional on March 6, 2011 · 10 comments

Home buyer credit really an interest free loanSince we have “house brain” Mr. BP and I are reading up on home ownership and all that it entails.   Our friends and families know we have been house hunting for many months now and so for my birthday one of my friends bought us  USA Today’s “The Essential Guide for First-Time Homeowners” .  Honestly, it’s not a real page-turner but it is filled with some great tips for first timers

First time home buyer credit?

As I was reading the other night I came across something that surprised me.  Well, in fact after discovering it I was not really surprised about what was happening but more surprised I had not heard anything about this particular aspect.  You see, by the time we began our house purchase the first time home buyer “credit” was already long gone.

Now we personally know many people who took advantage of the first time home buyer credit.  From what we understood from them and from what we heard through media outlets (again not paying too close of attention) is that the credit was offered to first-time home buyers as an “$7,500.00 credit” that would not have to be repaid.  Aside from the extension granted, we did not hear anything else about the first time home buyer credit.

However, as I read my new book I learned there were a number of stipulations regarding the “credit” and that for many people it is not a “credit” at all, but an interest free loan that has to be paid back.  I told Mr. BP right away, thinking this was probably common knowledge and I had just been engrossed in other things.  But after speaking with him and some extensive online research I found that many people were unaware of the exact parameters set regarding the “credit”.

Michelle Singletary, a personal finance columnist at The Washington Post featured the housing tax “credit” in an article written back in 2008.  How is it that we did not know the money, in most cases, has to be paid back?  I figured I should go to the source of the “credit” to find out what they are saying about the “credit”.

According to the IRS website, for homes purchased in 2008, the credit, with some exceptions, must be repaid and takes the form of a $7,500 interest-free loan. For homes purchased in 2009 prior to November 7, the credit is for a maximum of $8,000 and, with some exceptions, does not have to be repaid, but it’s only for new homeowners who have not owned a home in the prior three years.  And, beginning November 7, 2009, an additional category of new homebuyers, long-time residents (who owned their own homes), was added. The credit for this group is a maximum of $6,500, which, with some exceptions, does not have to be repaid. (1/27/10).

The site continues with numerous caveats including definitions of “first-time homebuyer” and certain income limitations that exclude application for the credit.

First Time Homebuyer Credit or Loan: Conclusion

So, they are not hiding what the “credit” is but they continue to promote it as a “credit” but in some instances it simply is an interest free loan.  The National Association of Home Builders website continues to indicate “The tax credit does not have to be repaid unless the home is sold or ceases to be used as the buyer’s principal residence within three years after the initial purchase”.  Again, a lot of that depends upon timing.

Did we miss something? Is this common knowledge? Let us know, because we were pretty surprised.

{ 9 comments… read them below or add one }

1 Nicole March 6, 2011 at 7:52 pm

IIRC, there were two of these things offered over different time periods. First there was a loan version that had to be paid back. It got a little publicity but wasn’t all that popular so you may not have heard much about it. Then later there was a credit, which did not have to be paid back and got expanded. Some people and some houses did not qualify. There were also phase-outs. It was very popular and some people credit it for helping the housing market.

I do not think that either of these were misrepresented at all. I think this stuff was common knowledge to people who were either in the market for houses at the time or had friends and relatives in the market (like my sister).

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2 Mrs. BrokeProfessional March 6, 2011 at 9:12 pm

While I do believe you recall correctly, I am not sure this was “common knowledge” to those involved in purchasing homes at the time. I agree the information was readily available to those looking for it, but for the people Mr. BP and I know who purchased and took advantage of the “credit”, they were not aware, despite being highly educated individuals. I think it was a case of “too good to be true” and for many, money was tight and a credit sounded too good to pass up.

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3 Kelly March 6, 2011 at 8:32 pm

I agree with Nicole.

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4 Pamela March 6, 2011 at 8:49 pm

The changes in the laws did confuse some people, including some real estate professionals. To add to the confusion, the law stated that the credit could be “monetized” by nonprofit organizations or FHA lenders so that buyers could get the money at closing, when they most needed it. That word did get out to a lot of buyers but very few organizations offered it.

The complications of ever-changing laws and programs is one reason I think every first time home buyer benefits from a homebuyer education class. Even the smartest buyer in the world can’t know everything on her own.

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5 Sustainable PF March 6, 2011 at 9:39 pm

Hello Friends,

We (I) are revisiting our home purchase last summer. Please check out our article posted in the morning entitled “buying a home”.
Hopefully we can shed some light on the experience for you two.
Cheers,
SPF

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6 Mr. Broke Professional March 6, 2011 at 10:09 pm

That will be very cool as we are closing on our first house at the end of the month.

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7 Aloysa March 7, 2011 at 1:43 pm

My friend used the one that was a credit that she didn’t have to pay back until now. Now, it is $500 she has to pay back. It was a nice move two years ago. Now… I am not sure about it.

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8 Temi March 8, 2011 at 11:18 pm

Basically what happened was congress passed the first law which provided for an interest free loan which people could take advantage of as a tax credit with recapture provisions ( a repayment schedule spanning several years.) Everyone who got the interest free loan was pretty happy with that situation UNTIL congress deciding that wasn’t stimulating the housing market enough and expanded it and eliminated the recapture unless people stopped using it as a main home within a certain specified period. Then everyone who had to repay the credit was ANGRY because congress offered an even better credit to people who bought later. If you bought your house on X date you had to repay. If it had closed one day later you were free and clear. Sorry.

Now, the IRS basically has to monitor the living situation of thousands of people who claimed the credit to try and determine if it needs to be repaid, not to mention trying to collect from the thousands of prison inmates who somehow managed to buy a main home while residing in prison.

I agree with Nicole. I don’t think there was any misrepresentation of the credit. But any time you mix “common knowledge” with “tax law” you are bound to run into problems, no matter how well educated the people involved are.

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9 Mr. Broke Professional March 8, 2011 at 11:26 pm

Temi:

Thank you for the clear and detailed answer to this. I think we missed the boat because we were simply graduate students at the time with no thought of ever buying a home. lol. Now that you mention it I do remember reading that at the time, or perhaps hearing about it in one of my real estate or tax law classes. Suffice to say I am not a tax or real estate lawyer today, although of course those things touch on almost everything. By the time we got into the housing market both taxes were long since expired. That sounds like a terrible thing for the government to have to manage. Our site never gets too political, but I figured even when it was going on that it would only artificially raise the market and create more logistical nightmares for the government. Thanks again Temi. I really appreciate you taking the time to provide an in-depth explanation to us and our readers. I think that is case closed on this one, if it wasn’t already after Nicole’s response.

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