By Brianne Paugh
Not long ago I was sitting at the settlement table conducting a closing with a Buyer, who in every possible way appeared to be a First-Time Maryland Homebuyer: The box on the Sales Contract was checked indicating that she was a First-Time Maryland Homebuyer and the corresponding Addendum was attached to the Contract. According to the lender’s records, she planned to occupy the property as a principal residence. The lender did not collect State Transfer Tax from the Buyer as a closing cost, consistent with Maryland law that a First-Time Maryland Homebuyer is exempt from paying State Transfer Tax. See Md. Code, Real Property Article § 14-104(c)(2).
During the settlement, in response to my questioning, the Buyer confirmed that she planned to live at the property as her principal residence and that she had never owned property in the State of Maryland before that was her principal residence. She signed the First-Time Maryland Homebuyer Affidavit attached to the Deed attesting to the same under penalty of perjury. After all the papers were signed, funds were disbursed, and as part of our post-closing procedures, the recording package was assembled. Nothing in this closing appeared to be out of the ordinary. However, things are not always what they seem.
Early the next day, I received a phone call from the Buyer that went something like this:
BUYER: I may not be a First-Time Maryland Homebuyer.
BRIANNE: Why not?
BUYER: Because I was added to the title of my ex-husband’s property ten years ago.
BRIANNE: Did you live at the property as your principal residence?
BRIANNE: Did you tell your Realtor this?
BRIANNE: Did you inform your lender?
BRIANNE: What did they say?
BUYER: They said it was fine; that I still qualified as a First-Time Maryland Homebuyer because I was added to title over ten years ago . . . .
(Does this sound problematic to anyone? That’s because it is).
What Is A First-Time Maryland Homebuyer?
The Buyer in my example, who from all angles seemed to qualify as a First-Time Maryland Homebuyer was actually not. A First-Time Maryland Homebuyer is: “ an individual who has never owned in the State  residential real property  that has been the individual’s principal residence.” Md. Code, Real Property § 14-104(a) (emphasis supplied); See also Md. Code, Tax – Property § 13-203(b)(1). There appears to be some confusion in the industry as to whether someone who has owned property in the State as their principal residence can years later qualify for First-Time Maryland Homebuyer status. The idea of a waiting period of four, eight, ten years, and so forth, where someone can re-qualify, is not the law. Simply stated, “First-Time” means first-time. Once someone owns property in Maryland and occupies it as their principal residence, they can no longer qualify as a First-Time Maryland Homebuyer.
What if, out of two Buyers, one of them had purchased property previously in the State and occupied it as their principal residence? Can the Buyers together still qualify for First-Time Maryland Homebuyer status, based on the Buyer who has never owned property before? No, they cannot. The Buyer who owned property previously as a principal residence spoiled it for the both of them. Bottom line: To qualify as a First-Time Maryland Homebuyer transaction, all Buyers must have never owned property before in the State as their principal residence.
Owners And Borrowers Are Not Always One In The Same
The Buyer’s situation brings up another important point: A person can use up their First-Time Maryland Homebuyer status without ever putting a dollar down on the property. For the Buyer, her status was spent when her ex-husband added her to the property title of the home he purchased. Here’s another example: At a different settlement involving two Buyers, both Buyers qualified as First-Time Maryland Homebuyers. Only one of the Buyers was on the Note. The other Buyer was the Borrower’s girlfriend, who was being added to title only, with no financial liability on the loan. The girlfriend told me that she planned on buying her own house sometime in the future, and asked me if there were any disadvantages from her perspective in being added to the property title. You guessed it—the girlfriend could no longer qualify as a First-Time Maryland Homebuyer for any future home purchase.
Back To The Original Buyer’s Scenario: The Problem
Let’s go back to my original example and the phone call I received. What is the consequence of the Buyer representing that she is a First-Time Maryland Homebuyer (setting aside the fact that she was incorrectly advised by her agent and lender)? It all circles back to the benefit the law affords her by qualifying as a First-Time Maryland Homebuyer—being exempt from paying State Transfer Tax: The State Transfer Tax is reduced to one-quarter of one percent and must be paid entirely by the Seller. See Md. Code, Tax-Property § 13-203(b)(3). If the Buyer is not exempt from paying it (meaning Buyer is not a First-Time Maryland Homebuyer), the Buyer is required to pay (unless negotiated otherwise between the parties). The Deed simply cannot be recorded without collecting the correct amount of Transfer Tax.
Let’s say that the Sales Contract erroneously disclosed that Buyer is a First-Time Maryland Homebuyer and the mistake is not discovered until settlement (as it was for the Buyer who called me the day after closing). What if the Buyer does not have the funds to pay one-quarter of one percent (.0025) on the total consideration paid for the property? If not, who might the Buyer look to for payment? Potentially her agent and her lender who incorrectly informed her that she qualified as a First-Time Maryland Homebuyer. In the Buyer’s case, her share of the State Transfer Tax totaled roughly $600.00. Besides that, she signed an Affidavit under penalty of perjury that she was a First-Time Maryland Homebuyer. Luckily, the Deed had not been taken to the courthouse for recording yet. At the Buyer’s direction, and after I informed the agent and the lender of the improper disclosure, I removed the Affidavit from the Deed and collected a check from the Buyer for her share of the Transfer Tax.
How Do I Properly Disclose First-Time Maryland Homebuyer Status?
Let’s change the facts slightly to illustrate another point: On the Contract, the box was checked indicating that the Buyer was a First-Time Maryland Homebuyer (and let’s say she really is), but no separate First-Time Maryland Homebuyer Transfer and Recordation Tax Addendum was attached to the Contract. Buyer is using a large, national lender, unfamiliar with the details of a Maryland Sales Contract. Lender overlooks the tiny First-Time Maryland Homebuyer box checked. There is no separate Addendum attached disclosing as much, and lender collects State Transfer Tax. I’ve seen this happen on several occasions, but this error is easier to fix. Aside from delaying settlement, at no cost to the Buyer, the lender can simply edit and send a revised Closing Disclosure removing the tax. However, the issue could have been prevented by attaching the First-Time Maryland Homebuyer Addendum.
In order to qualify as a First-Time Maryland Homebuyer, a Buyer must have never owned residential property in the State of Maryland that was their principal residence. It does not matter whether or not the property owner is a borrower on the Note. All Buyers to a transaction must meet these requirements in order to receive an exemption from payment of the State Transfer Tax. First-Time Maryland Homebuyer Status must be disclosed in the Sales Contract and it is good practice to attach the corresponding Addendum as well to ensure that a lender does not miss applying the exemption. Improper disclosure of First-Time Maryland Homebuyer status will result in the Buyer either paying State Transfer Tax when not required by law or not paying it when the circumstances are such that it must be collected, not to mention the misrepresentation itself that may create additional legal problems. To avoid potential liability for an improper disclosure, contact an attorney with any First-Time Maryland Homebuyer questions.
Readers with questions about this or any real estate legal matter can reach Brianne at 301-698-9300.
*Brianne Paugh is an Attorney with Village Settlements, Inc. and The Law Offices of Parker, Simon, Hahn & DeLisi, LLC, in Frederick, Maryland, and is an Adjunct Professor of Real Estate Law at Frederick Community College. Brianne was selected as the 2017 Affiliate of the Year by the Frederick County Association of Realtors.