Biden's First-Time Homebuyer Tax Credit: How It Would Work

Between ensuring a good credit score and saving for a down payment, among many other details, homeownership is something many people have to work toward for years.

Add a competitive housing market with few properties for sale and plenty of eager buyers willing to raise their offer, and first-time homebuyers, in many ways, feel edged out. The National Association of Realtors reports the median price for existing homes sold in April 2021 was $341,600, a 19.1% increase year over year.

To help more would-be first-time buyers enter the market, however, the federal government is looking at options for providing down payment assistance or a tax credit to help make the purchase and first year of homeownership more attainable. President Joe Biden included a first-time homebuyer tax credit in his campaign platform, and now many lawmakers are taking action in Congress to see some form of assistance available to first-time buyers.

But nothing has passed yet -- or even been voted on. With multiple bills in committee or in the preparation stage before introduction, we're breaking down what a couple of these bills could do if they become law, who they would benefit and how their impact could change if they're altered before being approved.

[Read: How to Buy a House.]

Here are the proposed bills and how they could impact you:

-- The First-Time Homebuyer Act.

-- The Downpayment Toward Equity Act of 2021.

-- What will first-time homebuyer assistance do?

-- What are the potential downsides to first-time homebuyer assistance?

-- Will these bills pass?

-- What if the bills change?

The First-Time Homebuyer Act

Introduced in the House of Representatives in April by Rep. Earl Blumenauer and Rep. Jimmy Panetta, the First-Time Homebuyer Act would establish a refundable tax credit of 10% of a home's purchase price, up to $15,000 for the purchase of a home.

To be eligible for the tax credit, the buyer must be a first-time homebuyer, or not have owned or purchased a home in the last three years. The buyer's income must also be at or below 160% of the area's median household income, and the home's purchase price must be at or below 110% of local median home purchase price.

As it currently stands, this bill most closely resembles the $15,000 homebuyer tax credit proposed by the Biden campaign ahead of the 2020 election. In a press release at the time of the First-Time Homebuyer Act's introduction on Apr. 26, Blumenauer referenced Biden's proposition, noting that there is historical precedence for a first-time homebuyer tax credit. The 2008 Housing and Economic Recovery Act included a temporary tax credit along similar lines and was claimed by nearly 1.5 million households, according to the press release.

The Downpayment Toward Equity Act of 2021

The Downpayment Toward Equity Act of 2021, on the other hand, would filter funds to states through the U.S. Department of Housing and Urban Development for direct down payment assistance, rather than as a tax credit.

This act offers up to $25,000 in down payment assistance. Eligible homebuyers must be first-time homebuyers (or have not owned a home in the last three years) and also are considered first-generation homebuyers. First-generation homebuyers are defined as people whose parents never owned a home during the current buyer's lifetime, or owned a home and lost it to foreclosure, short sale or deed in lieu of foreclosure and do not currently own a home.

Eligible recipients must have income at or below 120% of the area's median household income, though in high-cost areas that limit is raised to 180%. To receive the full $25,000, the recipient must also be a "socially and economically disadvantaged individual," which is defined as being part of a racial or ethnic group historically subjected to bias or prejudice (Black, Hispanic, Asian American and Native American individuals are specifically defined as socially and economically disadvantaged), or be otherwise able to provide evidence of social disadvantage.

There was some confusion in early May when false reports on social media led many to believe the Downpayment Toward Equity Act of 2021 had passed -- it did not, and remains in the early stages of discussion in the House. A discussion draft of the bill is available online through the House Financial Services Committee.

What Will First-Time Homebuyer Assistance Do?

While both bills state their goal of helping lower-income households achieve homeownership, particularly for minority communities with historically lower rates of homeownership, the Downpayment Toward Equity Act is more directly aimed at providing assistance to those communities.

Andy Winkler, associate director at the Bipartisan Policy Center for housing and infrastructure projects, notes that focusing on increasing homeownership in underrepresented communities would be a major change. "We really haven't made any significant progress in the racial homeownership gap" in decades, he says.

Though funded and provided to recipients differently, there is a chance both bills could help with the down payment on a home, if the tax credit is available at closing rather than as a reimbursement after the fact. "Even in a market where housing costs are so high, any house down payment assistance is good," says Danielle Samalin, CEO of Framework Homeownership, an online platform focused on empowering homeowners.

Compared to other tax-related homeownership benefits, such as deducting property taxes or mortgage interest paid throughout the year, homeownership assistance at the proposed levels appear aimed at helping to make homeownership possible, rather than a side benefit. "It's more than a perk, I think it's a really, really good tool. Down payment assistance is really, really important," Samalin says.

[Read: First-Time Homebuyer Programs for Florida Residents]

What Are the Potential Downsides to First-Time Homebuyer Assistance?

While first-time homebuyer assistance has many benefits, lawmakers and housing experts are also weighing the potential problems that could be exacerbated by first-time homebuyer assistance at the federal level, or even existing problems in the housing market that could render new solutions useless.

Winkler explains that lawmakers are conscious of the fact that as home prices rise, financial assistance may make an already competitive housing market even more competitive.

"It's doesn't necessarily fix the housing affordability issue, and in some markets (may) even make it worse," Winkler says.

Even if prices don't increase as a result of federal home purchase assistance, eligible recipients could still find themselves unable to purchase a home simply because not enough houses are on the market.

"A lot of people are saying, 'What good is down payment assistance if you can't find a house to buy?'" Samalin says.

Will These Bills Pass, and When?

Lawmakers will have to consider all potential benefits and pitfalls as they develop the bills ahead of any vote. Despite more widespread knowledge about them, the First-Time Homebuyer Act and the Downpayment Toward Equity Act of 2021 both have a long way to go before they're ready to be seriously considered.

"The two bills in the House now don't have bipartisan support, so they're less likely to advance as-is in the Senate," Winkler says.

Both bills, and many others, could be seriously considered and passed to serve multiple groups or provide assistance in different ways. Lawmakers could also choose to focus on getting one bill through instead.

The timeline for any of these bills remains a mystery, currently. It's reasonable to expect individual bills without current bipartisan support to take longer as adjustments are made to bring on more supporters of the bill to increase the chances of passing in both the House and Senate. As a result, don't expect immediate passage of these bills. "My best guess is that it will take longer than people expect," Winkler says.

That doesn't mean there's no hope for a fast-tracked bill meant to aid first-time homebuyers. "The X factor there is if it can attach to something like an infrastructure bill," Winkler says.

[READ: 2021's Top First-Time Homebuyer Programs in Maryland.]

What if the Bills Change?

As with any bill introduced to the House or Senate, expect the bills to undergo at least some changes. Eligibility requirements could change, the amount offered to recipients, how the money is rolled out or the permanency of the program could all be in flux.

Winkler says he wouldn't be surprised to see some additional, minor requirements added to any form of first-time homebuyer assistance aimed at helping homeownership become more sustainable through additional education. "Coupling this kind of assistance with housing counseling is very popular," Winkler says.

Changes do have the potential to lessen the positive impact first-time homeownership assistance could have. Lessening the maximum amount provided as a tax credit in the First-Time Homebuyer Act, for example, could reduce the number of people who otherwise wouldn't be able to afford a home. "Already a $15,000 down payment in markets like California has very little impact," Samalin says.

For now, constituents can reach out to their representatives and senators to encourage a stance on federal first-time homebuyer assistance. For those hoping for federal assistance to be able to purchase a home, it remains a waiting game. Many states offer first-time homebuyer programs that can offer down payment assistance, loan programs and even grants to help achieve homeownership, which may be the best resource now while federal-level assistance is still in the discussion phase.