Free Money for Home Buyers

Mortgage rates are near all time lows and Congress has extended tax credits for first-time home buyers that was set to expire last week. In addition, they expanded the law to provide tax credits for existing homeowners who purchase a new home. It all adds up to an excellent opportunity to buy a home now. Here are all the details:

First-time home buyers. If you have not owned a home for the past three years, you qualify as a first-time home buyer under this federal program. Buy a home now and you can receive a tax credit of ten percent of the purchase price up to $8,000. Unlike a tax deduction, a tax credit is a dollar-for-dollar offset against federal taxes owed. For first-time home buyers, homes bought between January 1, 2009 and May 1, 2010 qualify for the tax credit.

Long-term homeowners. To qualify as a long-term homeowner, you must have owned your current home for a minimum of five years. The tax credit for you is equal to ten percent of the home’s purchase price up to a maximum of $6,500 for homes purchased after November 6, 2009.

General rules. The home you buy must be your primary residence, so a vacation home at the beach won’t qualify. Also, under the extended and expanded law, you don’t qualify if you purchase your home from a family member. You are likewise ineligible if you make too much money. For single tax filers, the tax credit is phased out between $125,000 to $145,000 adjusted gross income. For joint tax filers, the phase out is between $225,000 and $245,000. Homes purchased for more than $800,000 do not qualify for the tax credit. “If you sell your new home or fail to occupy it as your primary residence within three years of the purchase date, you’ll owe the federal government back all of the tax credit you received,” according to Scott McFadden, a Certified Mortgage Planner with MortgageBanc, LLC in Birmingham, AL.

It’s also important to note that you won’t be able to use the tax credit as part of your down payment. You’ll receive the tax credit at the time you file your tax return, which for most people will be April 15, 2010. If the tax credit exceeds your federal income tax, you’ll receive the excess as a tax refund.

Combine these tax credits with low mortgage rates and a very favorable home buyers market and now is a great time to buy a home. Both 15-year and 30-year mortgage interest rates are under five percent. And while the housing market is showing signs of recovery, home prices are still very attractive. This is a great opportunity for parents and grandparents to get involved in helping adult children buy their first home by assisting with the down payment. You might even help them become a real estate investor.

Consider this strategy. Sometime after the required three-year primary residence period, your child could turn the home into a rental property. The result? Your child bought the home at a time when home prices were depressed with the help of the government at a low interest rate and he or she is now receiving rent and tax benefits of owning rental property.