First-Time Home Buyer Definitions and Benefits
If you meet the definition of a first-time home buyer (FTHB), you may qualify for penalty-free IRA distributions and/or a Federal Housing Authority (FHA) loan. You can still be considered an FTHB even if you've previously owned a home, and the definition varies depending on what government-related action you're taking.
If you want to withdraw money from a traditional IRA before the age of 59½ so you can purchase or build a home, you can do so without paying the usual 10 percent tax penalty if you are an FTHB. According to Internal Revenue Service (IRS) publication 590-B, you are a first-time home buyer:
"If you had no present interest in a main home during the 2-year period ending on the date of acquisition of the home which the distribution is being used to buy, build, or rebuild. If you are married, your spouse must also meet this no-ownership requirement."
In simple language, you or your spouse can't have owned a home for two years prior to the home you are now acquiring. The "date of acquisition" is defined as the date you sign a contract to buy a home or the date on which construction or reconstruction of a home begins.
In addition to buying, building, or rebuilding a home, you may also use the distribution to cover settlement, financing, or other closing costs. And you must use the money "before the close of the 120th day after the day you received it," publication 590-B says.
Keep in mind that although you won't have to pay the early withdrawal penalty on the amount you take out of your IRA, you will still have to pay your regular income tax rate on it.
You're also permitted to spend the money from an early withdrawal on the main home of an FTHB other than yourself. That person may be your spouse, your child or grandchild, your spouse's child or grandchild, your parent or other ancestor, or your spouse's parent or ancestor.
The maximum amount you may withdraw for all FTHB distributions throughout your lifetime is $10,000. If you're married, your spouse may withdraw a total of $10,000 as well.
Roth IRA Distributions
You may withdraw the total amount of money you've contributed to a Roth IRA prior to the age of 59½ without paying any tax penalty—for the first-time purchase of a home or any other purpose—because you funded that retirement account with your after-tax dollars. And there is no $10,000 limit on those distributions.
However, if you want to withdraw more than the amount of money you invested in the Roth IRA, meaning you'll be withdrawing gains from your invested amounts, you will have to pay the 10 percent penalty on those greater distribution amounts.
FHA Mortgage Program
For a lower-interest-rate FHA mortgage, the basic definition of an FTHB is someone who hasn't owned a home in the past three years. According to the website of the Department of Housing and Urban Development (which oversees the FHA), you may also be considered a first-time home buyer if you are:
- A single parent who has owned a home only with a former spouse while married.
- An individual who is a displaced homemaker and has owned a home only with a spouse.
- An individual who has only owned a principal residence not permanently affixed to a permanent foundation in accordance with applicable regulations.
- An individual who has only owned a property that was not in compliance with state, local, or model building codes and that cannot be brought into compliance for less than the cost of constructing a permanent structure.
The FHA does not issue these loans; you obtain them through a bank. You may put down only 3.5 percent of the price of the home as your down payment if you have a credit score of 580 or better. If your credit score is from 500 to 579, you will need to put down 10 percent.
Most banks will be unwilling to lend to you if your credit score is less than 580.
Someone—a family member or close friend—is allowed to gift you the amount of your down payment if you don't have it yourself.
There are many state-administered FHA programs that assist home buyers with down payments. And individual counties determine the maximum and minimum amounts you can borrow through an FHA mortgage.
Borrowers who obtain FHA loans are required to buy mortgage insurance, which typically costs from 0.80 to 1.05 percent of the value of the loan amount annually.