The housing market is gaining momentum. But according to the Realtor Association of the Sioux Empire, national homeownership is the lowest since 1993. Rental rates continue to climb causing some to reconsider signing a lease. Lending practices and mortgage rates also influence the amount of people who decide to become homeowners.
The government is encouraging people to buy, implementing programs like the First-Time Homebuyer Program to make homeownership more affordable. It's also part of national tax policy and gives first-time homebuyers a great incentive to enter the market.
If you’re in the market for a new home, Kevin Carlson, a Plains Commerce Bank Mortgage Banker in Sioux Falls (NMLS# 22004), is happy to answer questions about South Dakota’s First-Time Homebuyer program.
What are the top benefits of South Dakota’s First-Time Homebuyer Program?
The South Dakota Housing Development Authority is offering homebuyers the option of getting a Mortgage Credit Certificate (MCC) when they buy their first home through South Dakota’s First-Time Homebuyers Program.
Mortgage interest has been tax deductible for some time, but this MCC credit is different. It is a tax credit—a dollar-for-dollar reduction of your taxed income. So a $2,000 tax credit through the program could save you $2,000 in taxes. This is different than a tax deduction, which only lowers your taxable income.
Homebuyers who take advantage of the MCC could see their income tax liability reduced by as much as $2,000 per year for every year they have their loan. Hypothetically, if a person’s tax refund is $2,500 for a given year, that refund could be as high as $4,500 with the MCC tax credit.
What are the downsides of the program?
While the upside of the program is tax liability reduction, there are some trade-offs. Opting for the MCC can add as much as $750 to your bottom line closing costs when purchasing a home. The interest rate goes up .375% if you purchase using the MCC, too.
It comes down to math. If you’re weighing the pros and cons of the MCC, ask your mortgage banker to run the numbers to determine the short- and long-term costs and benefits.
Do only first-time homebuyers qualify? Are there exceptions?
Only first-time homebuyers can apply, but there is one trick. The government considers anyone who has not owned a home in the past 3 years to be a first-time homebuyer. If you owned a home previously, but sold it more than three years ago, you may be eligible for first-time homebuyer status.
What if you're buying a house with someone else and you're a first-time homebuyer and they're not?
All borrowers must be first-time homebuyers. The only exception to this rule is if there is a non-occupant co-borrower—a co-signer for the loan who won’t be living in the house. This is rare.
What is the deadline to apply?
While there is no known deadline, there is a finite amount of funds available for this program. As a general rule, the sooner you apply, the more you’ll increase your odds of getting in on it.
How do I know what’s right for me?
Weigh the pros and cons before you decide. While this program can be beneficial for many buyers, it is not for everybody. First, ask yourself how long you intend to have the loan. This will determine the number of years the tax credit will benefit you. Also, think about your current tax burden. If you pay very little in taxes now, the MCC may not benefit you.