Ask the Expert: What is this new tax credit for down payments?

The Biden administration has proposed a new tax credit that might make it easier for first-time buyers to make a down payment.

The proposed First Down Payment Tax Credit would provide qualified buyers with $15,000 at closing to be used toward a down payment.

The proposal has, at this writing, not yet been enacted. Some observers think that the final number might not be as high as $15,000. But most expect some sort of down payment credit to be enacted.

First-time buyers make up about 32 percent to 40 percent of all buyers. But historically, the down payment is the greatest hindrance to purchasing a home. According to some surveys, at least 37 percent of potential first-time buyers haven’t yet saved enough for a down payment on a house. About another 42 percent say they actually can’t save enough for a down payment. So, for them, the tax credit would be just what they need to get into their own home.

Buyers would have to meet their lenders’ eligibility requirements.

Your credit score has to be high enough.

FHA loans are the most lenient on this point, requiring a credit score of 580 with the smallest down payment (3.5 percent) but the score range is lower with a 10 percent down payment. For conventional mortgages, you need at least 620 to qualify.

Your DTI has to be low enough.

Your debt-to-income (DTI) ratio generally must be no higher than 45 percent or 50 percent for some conventional lenders. The maximum for an FHA loan is 57 percent. Other government-backed loans have higher maximums.

To calculate your DTI, add up all your monthly debts and then divide your debts by your total gross income. If your gross income is $3,000, divide that by your monthly obligations. Let’s say your bills come to $1,500 per month. You get .50. Multiply .50 by 100, and you get 50 percent. That is your DTI.

For tight housing markets, conventional loans may make it easier to buy than FHA loans, since FHA loans often involve some delays. Inspection and appraisal standards are more stringent. The percentage of FHA loans in the mortgage market is about 25 percent.