Home Buyer Tax Credit: Now, More Are Eligible

On the fence about buying a new home? Congress wants to push you into the market with an expanded home buyer tax credit.

The House on Thursday approved a bill that extends the $8,000 first-time home buyer credit and expands it to include some existing homeowners. The Senate approved the measure on Wednesday, and President Obama is expected to sign it on Friday.

Under the expanded program, homeowners would be eligible for a tax credit of up to $6,500 if they purchase a new home. To qualify, current owners will need to have lived in their prior residence for five consecutive years out of the past eight years. The credit would apply to home purchases under contract by April 30, 2010, as long as they close by June 30.

First-time buyers (and those who haven’t owned a home in the last three years) would continue to be eligible for up to $8,000.

As for income limits, the new credit would be available to individuals earning up to $125,000 or couples earning $250,000. That’s up from $75,000 and $150,000, respectively, for the current tax credit. The credit can only be used on homes that cost $800,000 or less, and cannot be applied to vacation or second homes.

Here’s what you need to know:

The new tax credit – coupled with low mortgage rates and the supply of affordably priced homes on the market – may give many people who had been ambivalent of buying that extra nudge to step into the market. And in contrast to the first-time home buyer credit, the new $6,500 credit is available to a larger part of the population, with higher incomes.

This is “a gift of $6,500” that could help cover closing costs or renovations, says JP Endres-Fein, a real estate broker and partner at Homes of Westchester in New York. “Over the next couple of months I suspect we’ll get a lot more people – who were in no hurry to buy before – to make a move a little earlier,” she says.

The legislation allows buyers to claim the credit if the home purchase is under contract by the end of April and closes by the end of June. That might sound like a long time, but not in the world of home buying, says Tara-Nicholle Nelson, owner of Re-Think Real Estate. “I would tell them they should be shopping now,” she says.

If you qualify and want to take advantage of the tax credit, to be on the safe side, consider from now until March your window to buy a house, says Endres-Fein. Keep in mind that once you have an accepted offer, the closing process can take a while and can also be delayed for any number of reasons.

(For tips on how to speed up the buying process, read our story, “4 Ways to Shave Time Off Buying a Home.”) 

The renewed tax credit is obviously good news for buyers, but it’s even better for sellers, says Jay Papasan, the vice president of publishing for Keller Williams Realty and co-author of “Your First Home: The Proven Path to Ownership.”

That’s because the real estate market is headed into what is traditionally the slowest months for real estate sales – October to April. Typically, sellers are advised that a home on the market in that time will probably get the least attention from buyers and attract lower offers than in busier periods, says Papasan. But the credit should renew interest in the market during those typically slow months -- and compel sellers to take advantage of any influx of buyers.

(Read advice on how to get the best deal when selling your home, read our story, "10 Common Mistakes Home Sellers Make.")

Buyers who are smack in the middle of a transaction now or have already accepted a contract should pause and figure out if they can take advantage of the credit. The first thing they should do is call their real estate agent or mortgage broker to find out if this money would be available to them and how they can apply, Papasan says.