Lenders provide first-time home buyers with incentives to encourage home ownership. You may have used a first-time homeowner program if you made a minimal down payment on the house, the government backs your loan, or you received a tax break after you bought. Lenders' definitions of first-time homeowners may vary, but in general, the term applies to borrowers who held no ownership interest in a primary residence before a purchase or refinance transaction. This means that you are not considered a first-time homeowner if you refinance.
First-Time Homeowner Benefits
The federal government, lenders, state and local agencies and non-profits offer many perks to first-time homeowners. Their programs increase borrowers' ability to qualify for purchase loans by providing down-payment and closing-cost help, flexible credit, income and asset guidelines and competitive interest rates. In general, first-time homeowner benefits apply to purchase transactions, rather than refinances. In a refinance, the lender no longer considers you a first-time owner or borrower, as you previously held title and borrowed money for the home.
A refinance transaction follows a home purchase, usually by several years, after you build equity. A refinance loan pays off an existing loan -- or loans, in the presence of a second mortgage -- with the proceeds from a new loan. Borrowers typically refinance to obtain a better interest rate, a new repayment term or other favorable loan conditions. They also refinance to cash out, or tap into the home's equity, without having to sell the house. The most common types of refinances include rate and term refinances, cash out refinances and streamline refinances, which require minimal qualifying or paperwork.
When you refinance, the lender requires you to disclose whether you use the property as your main home or as an investment property. Changing your home's occupancy status in a refinance may trigger repayment of tax credits. The federal government no longer considers you a first-time homeowner and requires repayment of tax credits when you stop using the home as your primary residence. First-time homeowners that bought homes between Jan. 1, 2010 and May 1, 2010 who received the First-Time Homebuyer Credit of up to $8,000 must repay the full amount of the credit if they converted the home entirely to a place of business or rental property, according to the IRS. The IRS determines whether the home is your primary residence by checking a variety of sources and comparing the information to your income tax records.
If you received first-time homeowner assistance that resulted in a second lien on your home, the lien holder may require repayment if you refinance. For example, you can use a down payment assistance loan, offered by certain government agencies, with a below-market interest rate that you do not pay back until you refinance the first loan, stop living in the house or sell it. At that point, you no longer qualify for the program because you are no longer a first-time homeowner. To remain compliant with the terms of a second mortgage, the second lien agreement must contain a clause that states it remains in second place -- that is, subordinate to the new first mortgage when you refinance.
- Realtor.com: First-time Home Buyer Loans: Pros and Cons
- IRS: Repaying the First-Time Homebuyer Credit and Understanding your IRS Notice
- HUD: First-Time Homebuyers
- IRS: First-Time Homebuyer Credit Questions and Answers: Basic Information
- California Housing Finance Agency: CHDAP
- Mortgage 101: What Is a Mortgage Subordination Agreement?
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