If You've Owned a Home Before, You Could Still Reap the Benefits of a "First-Time Homebuyer"

Despite a mild increase in mortgage rates in early August, mortgage applications are still on the upswing. First-time home buyers are finding their place in the competition, even as prices have risen more than 24 percent since the pandemic began.

The IRS offers first-time home buyers the chance to withdraw up to $10,000 from their IRA to fund a home purchase, and Biden has proposed his own First Time Homebuyer Act that would give people up to $15,000. Under the IRS definition of a first-time home buyer, even previous homeowners qualify in certain situations.

According to the IRS, a first-time home buyer can withdraw up to $10,000 from an IRA account without penalty for the purpose of purchasing a first home.

Given that the median listing price of a U.S. home in Aug. 2021 was $380,000, the $10,000 cap only amounts to a small fraction of the home's cost. Still, it can make a big difference on your down payment.

The IRS first-time home buyer label is a bit of a misnomer. While it applies to people who have truly never bought a home before, it also includes previous homeowners in the following categories:

• Single parents who owned a home with a former spouse during the marriage

• Displaced homemaker who formerly owned a home with a spouse

• Someone who owned a home that didn't have a permanent foundation in line with relevant regulations

• Someone who owned a home or property that wasn't up to code for state, local, and model building regulations, and which cannot be brought to code for less than the cost of building a new, permanent structure

What if your spouse, child, grandchild, spouse's child or grandchild, parent, other ancestor, or spouse's parent or other ancestor is a first-time home buyer? If so, you can fund their purchase with a penalty-free IRA pull, per the IRS rules.

Even if you fall in line with one of the four requirements for previous homeowners, you may still run into some issues. The IRS says you still have to pay a penalty on the early IRA withdrawal if you or your spouse owned a home within two years of the purchase of a new home.

For previous homeowners, the first-time home buyers loophole can come in handy. Just make sure you stay within the bounds as defined by the IRS, or else you risk having to pay a 10 percent penalty on your IRA withdrawal. Even without the penalty, note that you will have to pay income tax on the IRA distribution. Factoring this in could make a big difference for your down payment budget.