Buying your first home can be a challenge, but it has a number of advantages for your long-term financial health, from a source of equity to tax breaks.
First-time homebuyers, who make up about half the mortgage market, can take advantage of several benefits designed just for them. These benefits include federal and state government programs that can help them overcome the challenges of buying a home for the first time.
Learn more about what kind of benefits you can receive as a first-time homebuyer, and whether you qualify to receive them.
- A first-time homebuyer is typically someone who has not owned a home in the last three years, but there are exceptions.
- Buyers can turn to a number of programs to help them buy their first home, from down payment assistance to loan programs with more lenient qualifications.
- The IRS provides tax deductions for homeowners.
How Do You Qualify as a First-Time Homebuyer?
First-time homebuyers are typically buyers who are buying their first primary residence, but various programs apply different criteria. Being considered a “first-time homebuyer” doesn’t necessarily mean that you've never owned a home before.
For example, the National Mortgage Database defines a first-time homebuyer as someone who hasn’t owned a home in the last seven years—but some programs consider you a first-time buyer if you haven’t owned one in three years. The U.S. Department of Housing and Urban Development (HUD) uses the three-year rule, and if you’re married and buying a home together, only one of you has to meet this requirement.
HUD allows some exceptions to this rule. You’ll qualify as a first-time homebuyer with programs that follow HUD rules if you’re a single parent or displaced homemaker and you’ve owned a home with your former spouse. You can also qualify if you owned a home that wasn’t “permanently affixed to a permanent foundation,” such as a trailer.
Many first-time buyer programs are targeted to low- and moderate-income buyers and have income limits. For example, some government programs require that you make no more than 80% of the area’s median income.
Benefits of Being a First-Time Homebuyer
Qualifying as a first-time homebuyer can help you with a down payment to buy a property, and it can save you on taxes.
Down Payment Assistance
Buying a home usually requires you put down cash toward the purchase at closing that is a percentage of the amount you’re borrowing. This can be a significant hurdle for first-time homebuyers because saving a typical down payment of about 20% can take years. But some programs provide a portion of that money.
Down payment assistance can come in the form of grants you don't have to pay back. For example, the Arizona Department of Housing will grant from 2% to 5% of the amount you’re borrowing on your mortgage depending on the type of loan.
Government-Backed Loan Options
The federal government backs a variety of mortgages to make it easier for first-time homebuyers to qualify for financing. Loans from the Federal Housing Authority (FHA) are popular with first-time buyers.
The FHA won’t loan you the money directly. It insures your mortgage, promising to repay your lender if you default. You don’t have to be a first-time homebuyer to qualify. But to qualify for the Housing Choice Voucher (HCV) program, which provides assistance with down payments and monthly payments, you do have to be a first-time buyer. Credit-score requirements are more lenient with these programs.
The United States Department of Agriculture (USDA) and the Department of Veterans Affairs (VA) offer similar programs with no down payment requirements. The property you want to buy must be in an eligible rural area for a USDA loan, and you must meet low- to moderate-income requirements as well.
VA loans are restricted to active service members, veterans, and their spouses. These loans also don’t require a down payment.
Federal government assistance programs require that qualifying first-time homebuyers attend a HUD-approved Housing Counseling Class. You’ll learn about the mortgage process and receive one-on-one counseling to review your financial and credit situation.
You’ll receive a completion certificate that’s valid for two years. You’ll have to take the class again if you don’t buy a home within that time.
Your credit score and debt-to-income ratio can affect whether you’re eligible, and you also have to meet income requirements.
You don’t have to be a first-time homebuyer to take advantage of multiple tax breaks that come with owning a home. However, you will have to itemize your deductions to claim them.
The mortgage interest you pay each year is tax-deductible on loans of up to $750,000 of indebtedness, or $375,000 if you’re married and filing a separate tax return.
Home equity loan interest is deductible if you use the proceeds to “buy, build, or substantially improve” your property. You can’t use the funds to pay for your child’s wedding or pay down your credit card debt.
You can also deduct property taxes you pay, up to a $10,000 limit each year or $5,000 if you’re married and filing a separate return. But the $10,000 limit applies to both property taxes and any state and local income taxes you want to deduct. It’s a cumulative cap.
Start Building Equity
You’ll gain a little more equity in your home with each monthly mortgage payment. Each of your payments will include a portion of the principal balance of your loan. You can also gain equity as your home value appreciates.
You can benefit from equity in a number of ways. For example, you can cash it out with a home equity loan that uses your equity as collateral. You might also take out a home equity line of credit or a reverse mortgage.
Finally, you can reap the benefit of equity when you sell your home for its full value and make a profit. The IRS lets you realize capital gains of up to $250,000 on the sale of your primary residence, or $500,000 if you’re married, without paying a dime in capital gains tax.
Frequently Asked Questions (FAQs)
Is there an income limit to qualify as a first-time homebuyer?
Income limits vary from program to program. Some programs require that your income be no more than 80% of your area’s median income, which is set by HUD each year.
How much should a first-time homebuyer put down?
Conventional lenders usually want 20% of the total purchase price of your home if you want to avoid paying private mortgage insurance (PMI). But the FHA can require as little as 3.5%, and USDA and VA loans can provide loans that require no down payment at all.
How much is a first-time homebuyer loan?
Loan limits can depend on the type of loan you want to qualify for, and they aren’t necessarily restricted to first-time buyers. The FHA’s loan limit is $420,680 as of 2022.
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