It may be too late for most first-time home buyers to cash in on free money from the government aimed at stimulating the housing market. Under the American Recovery and Reinvestment Act of 2009 [AARA], a qualifying individual who has not owned a primary residence within the past three years can get a tax credit equal to 10% of the purchase price of a new home, up to a maximum of $8,000.(1) Moreover, unlike similar legislation passed last year, you never have to pay the money back.

But the deadline is fast-approaching. It’s not enough to simply make an offer on a property by Nov. 30 -- the deal has to be closed by this date. “Closed” means you actually take title to the property. “When the clock strikes twelve on December 1st, it’s over,” says Lucien Salvant, a spokesperson for the National Association of Realtors.

Prolonging the Process
The problem is, two things have to happen before you can close on a home: 1) the property has to be appraised, and 2) you need to secure financing. Both are taking longer than they used to. According to Salvant, these days “private lenders are requiring more documentation -- in some cases a lot more” -- before they will approve a mortgage. And, new regulations covering appraisers are also slowing up the process. As a result, Salvant says it’s commonly taking 60 days to get from offer to closing.

Toss in the fact that you’ll lose a day or two due to the Thanksgiving holiday in late November and it’s easy to understand why, if you haven’t already started the process, you may be out of luck.

Hail Mary Strategy
Still, if you’ve already zeroed in on a couple of homes you’re considering and you can find a co-operative lender, there’s one tactic you might consider: apply for a loan ASAP. In other words, get pre-approved for the amount you’ll need to borrow before you even decide which property you want to make an offer on. “Make sure you get ‘pre-approved’ and not simply ‘pre-qualified,’” says Salvant. The former means you’ve already got the loan, while the latter simply says you’re eligible for one.

What Qualifies?
According to the National Association of Home Builders, the property can be a single family home, a condo, a co-op, mobile home, or even a houseboat! It can be new construction or previously-owned. It can also be a home that you are having built as long as you move in by Nov. 30.

Again, the credit is only available if the property you’re purchasing is going to be your primary residence. So forget about using it to buy a vacation home or rental property.

Who Qualifies?

The first test you have to meet is the requirement that you have not owned a primary residence in the past three years.
There’s also an income limit. Abe Schneier, senior technical manager with the American Institute of Certified Public Accountants, says to be eligible for the credit, your “modified” adjusted gross income [MAGI] this year cannot exceed $75,000 if you file as a “single” taxpayer, or $150,000 if you are married. A partial credit is available provided your MAGI is not more than $20,000 above these amounts.

Using 2008 Income Instead of 2009
Even though you purchase the home this year, the law gives you the option of using your 2008 MAGI if that would enable you to meet the income limit. You might also want to use last year’s income if that would mean you can qualify for a larger credit. However, you will have to file an amended 2008 tax return.

The Marriage Penalty
If you’re married, both spouses must meet the three-year test about previously owning a home. That is, if you owned a condo, but your spouse rented, as a couple, you don’t qualify for this credit. If you both meet the 3-year test, your combined income will determine whether you meet the MAGI test.

However, if you’re not married to the person you’re buying the property with, then each of you is considered separately. If you both meet the eligibility requirements, you have to split the credit. How you do this is pretty much up to you provided it’s “reasonable.” One way, suggests Schneier, is “percent of ownership” based upon, say, how much each contributed to the purchase price.

Furthermore, if one of you owned a home within the past three years, but the other didn’t or one meets the income requirement, but the other earns too much, then the individual who qualifies can claim the entire credit, according to Schneier. This will not affect how the home is titled. For instance, the two of you can still own it as “joint tenants.”

With a Little Help From Mom and Dad
This opens the door for parents to help a child buy a home. Even if his parents have owned their current residence for 20 years and are joint owners of the new home, Junior could qualify for the tax break. As Schneier points out, “It’s the person who lives in the home that gets the credit. Not the one who’s financing it.”

What About the Red Tape?
It’s surprisingly simple to claim the credit. You or your tax preparer calculate the amount for which you’re eligible on IRS Form 5405 and then enter this figure on Line 69 of your 1040 income tax return. As mentioned above, if your income tax bill is less than the credit, you’ll get the difference in a check from Uncle Sam. For instance, if you owe $3,000 in income tax and your credit is worth $5,500, you’ll receive a check for $2,500.

Not So Fast
This credit is not meant to help speculators. You’ll have to re-pay the credit (known in tax-speak as “recapture”) if you don’t live in the home for three years.

Why Are You Reading This?!

If you’re in the market to buy a home and could qualify for this tax credit, time’s a-wastin’. Decide on the home your want. Get your paperwork to your lender ASAP. Be a pest. Check in with your realtor, appraiser and lender frequently to find out how they’re progressing. It might seem as if December is a long way off, but it’s closer than you think.

1. Since it’s a “refundable” credit, you will get a check from the government if your tax liability is less than the amount of your credit.

Ms. Buckner is a Retirement and Financial Planning Specialist at Franklin Templeton Investments. The views expressed in this article are only those of Ms. Buckner or the individual commentator identified therein, and are not necessarily the views of Franklin Templeton Investments, which has not reviewed, and is not responsible for, the content. 

If you have a question for Gail Buckner and the Your $ Matters column, send them to: yourmoneymatters@gmail.com, along with your name and phone number.