Pros & Cons of the First-Time Home Buyer Credit

Buying your first home is a major commitment, and it can also be a daunting financial investment. If you remain in the home, you'll spend the next 20 or 30 years paying off the mortgage and be responsible for maintenance, repairs and property taxes. Tax credits are one way to ease the burden of buying your first home, but locating credits that have a meaningful impact can be difficult.

Function

• Home buyer tax credits are allowances by the state or federal government that allow new home buyers to deduct a specified amount from their gross income when filing an income tax return. This means that the amount of the tax credit goes untaxed. New home buyers must submit documents that show proof of a qualifying home purchase and claim the credit on the appropriate tax form to receive the savings and be in compliance with the program and the tax codes.

Benefits

• The biggest benefit of claiming the first-time home buyer credit is the chance to save money on your taxes. When you deduct the credit from your income, that amount goes untaxed. Besides lowering the amount of income you must pay taxes on, this can also reduce your income and push you into a lower tax bracket, where you'll pay a lower percentage of tax on what you made during the previous year.

Effects

• Besides the benefits to home buyers, first-time home buyer tax credits have broader effects as well. This is why governments use home buyer tax credits as an incentive to encourage home ownership. For example, mortgage lenders can expect a rise in business as more new home buyers see home ownership as an affordable option. Real estate agents can also expect to see a spike in business when there's a popular tax credit available. Finally, the money new home buyers put into the housing market and the overall rise in demand for homes can help drive the real estate market and the economy in general.

Drawbacks

• First-time home buyer tax credits are temporary and available only to a limited group of buyers. Anyone who has purchased a home in the past is ineligible, as are buyers who want to purchase a home as an investment property and rent it out. The $8,000 tax credit offered through the Worker, Homeownership, and Business Assistance Act of 2009 expired in late 2010, leaving new home buyers without an option that would have saved them money just a few months before. Finally, new home buyer tax credits don't lower interest rates or make it easier for home buyers to get loans.

Alternatives

• When there is no current new home buyer tax credit on the books, or if you fail to qualify, you may still be able to take advantage of programs that will make it more affordable to own a house. The federal government's Making Home Affordable program is an ongoing effort to give home buyers access to affordable loans, even without being able to afford a traditional down payment. It also allows homeowners to keep their homes by modifying mortgages and reducing monthly payments to affordable levels. Special offers from lenders can also reduce the cost of a home, especially if you have good credit and qualify for their lowest interest rates.