News                     The $1,500 tax credit adjunct university professor Scott Wade expects to claim next year as a result of Rhode Island’s new incentive for first-time homebuyers wasn’t the reason he bought a three-bedroom bungalow in Cranston last month.

After years renting in Providence, he and his wife were ready to own and the thousands of dollars they will save over the life of their mortgage because of Rhode Island Housing’s new FirstHomes tax-credit program was just icing on the cake.

But given the tax windfall, Wade said the credits would have been a significant motivator if he had known about them and should be for other renters looking to make the jump to ownership.

“It’s absolutely an incentive,” said Wade, who teaches at both the University of Rhode Island and Roger Williams University. “There is a lot of extra cost to owning a home that we hadn't planned on, like maintenance, buying a lawnmower and that kind of stuff. This money is really going to help.”

Now a few years into a steady, if slow, housing-market recovery, this would seem to be late timing for Rhode Island to launch a new real estate stimulus program. After all, three years ago, both sales volume and median property prices were at their lowest levels in decades and needed a boost more than they do now. But Rhode Island Housing Executive Director Richard Godfrey said even though it is improved, the housing market could still use a boost and FirstHomes was the best tool at the agency’s disposal. “We wanted to do something that will aid homebuyers and kick-start the overall real estate sector,” Godfrey said. “Although this only applies to first-time buyers, that is the entry into the market that starts everything off. It is a real incentive and stimulus, and creates some enthusiasm.” He also acknowledged that the driver for the program’s timing had to do with the vagaries of federal law and state finance more than strategic considerations.

The FirstHomes tax credits – which are worth 20 percent of a buyer’s total annual mortgage interest – are made possible through Rhode Island’s authority to issue tax-free private-activity bonds.

Because tax-free bonds cost the federal government lost revenue, it places a cap on how much each state can issue annually. (The limit on tax-free bonds for private activities, such as student loans and economic-development loans, does not impact state bonding capacity for purely public projects.)

Because low interest rates have driven down demand for tax-free bonds over the last several years, this year Rhode Island ended up with $75 million in excess space under the cap and traded some of that borrowing authority for the federal tax credits, Godfrey said. A dozen or so states have similar programs, with New Hampshire being the closest to Rhode Island.

The program launched for buyers who applied for a mortgage after July 1 and by next July 1. Rhode Island Housing hopes to help 500 buyers through credits on mortgages worth $93 million, Godfrey said. At that volume, the overall value of the credits would end up worth about $1 million in that first year.

The credits are available to first-time, owner-occupant buyers throughout the state whose combined income for a one- or two-person household cannot exceed $86,280 per year or $100,660 for a household of three or more. The new properties cannot be worth more than $417,000, but Godfrey said that is almost never expected to come into play because of the income limit. In addition to first-time buyers throughout the state, the credits are open to repeat buyers in certain targeted census tracts in Providence, Pawtucket, Central Falls and Woonsocket. Unlike the federal mortgage-interest deduction, the credit is dollar-for-dollar within its 20 percent limit and does not require the buyer to itemize their deductions. Recipients can claim the credit each year of their mortgage, with the amount they get back declining as they pay down the debt.

Buyers secure the credit through either a Rhode Island Housing loan or a loan through a growing list of participating lenders.

As of Aug. 1, 20 lenders had been cleared to participate and more were expected soon.

Securing the tax credit does involve filling out some paperwork with a mortgage application, but recent buyer Wade said it was only somewhat noticeable in the context of all the forms signed during the sale process.

There is also a $100 credit “reservation” fee plus issuance fees of $500 for loans going through Rhode Island Housing and $750 through outside lenders.

Stephen Tetzner, founding partner of Homestar Mortgage, one of the lenders participating in the program, thinks the FirstHomes credit will have a similar impact to the federal first-time buyer tax credit that ended in 2010. Those credits spurred a spike in sales, which then came crashing to a halt when it ended. “When you are doing an analysis of ‘should I rent or buy,’ when you figure this in, more times than not a buyer will find it more economical to be an owner,” Tetzner said. “It is one of the best opportunities around.” Since FirstHomes launched, Godfrey said many have asked about first-time buyers whose purchases came before July 1 and had no idea money would soon be passed out for doing what they already did. Unfortunately, they are out of luck. Another question is whether the government should be increasing subsidies for homeownership when reckless buying – and lending – contributed to the recent economic crisis. “Now we are looking at low interest rates that are going to go up, and we could be looking at mid-5 percent or even 6 percent rates in two years – so it is a great time to buy,” Godfrey said. “All the numbers show for many people the American dream is to own their own home. We want people to achieve those dreams.”


Jim DeRentis
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