How Some States Are Helping First-Time Home Buyers
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Efforts to help potential first-time home buyers save for down payments using special tax-favored accounts have been gaining traction in state legislatures.
Three states passed legislation this year authorizing the accounts: Iowa, Minnesota and Mississippi. Three other states had previously approved them: Colorado, Montana and Virginia.
Down-payment accounts may be helpful, said Adriann Murawski, state and local government affairs representative with the National Association of Realtors, because rising home prices have made it harder for buyers to come up with the money for them. The association and its state counterparts have actively promoted legislation creating the accounts as a way to help spur home buying.
A recent report from the Urban Institute found that 53 percent of renters said that they couldn’t afford the down payment to buy a home.
Rules for the accounts vary by state but, in general, the measures allow first-time home buyers to save for a down payment — and related expenses like closing costs — in dedicated savings accounts. In some states, savers get a tax break for their contributions by deducting the amount they’ve saved that year from their state income tax returns. In others, like Minnesota, the contribution is not deductible. Instead, savers can subtract interest earned on the savings from their taxable income, a less generous approach since interest rates for basic savings accounts remain low.
Mississippi is generous, allowing a tax benefit for both contributions and gains on the money. Potential home buyers can set aside up to $5,000 each year for couples, and $2,500 for individuals.
Some states limit the deduction to buyers who have never owned a home, while others offer it to those who haven’t owned one in the past three years, a nod to potential buyers who may have lost a home in the Great Recession.
States typically cap the total amount that can be saved and impose penalties if funds are used for purposes other than a down payment. Most focus on basic savings accounts, but some states allow funds to be held in brokerage or investment accounts.
Ms. Murawski said the association hoped that more states will consider authorizing the accounts next year, including Alabama, Louisiana, Michigan, Missouri, and Pennsylvania.
Earlier this year, the New York Legislature passed a measure authorizing tax-favored down payment accounts. But the bill, called NY First Home, awaits action by Gov. Andrew Cuomo, according to the New York State Association of Realtors. The measure would allow state income tax deductions of $5,000 for individuals and $10,000 for couples saving for their first home. If signed into law, the accounts would probably be available beginning in tax year 2019, said Michael Kelly, the association’s director of government affairs.
Saving for a down payment is especially challenging for younger adults, who face rising rents and may be paying off student loan debt, said Christopher Coes, vice president for real estate policy and external affairs at Smart Growth America, a coalition promoting sustainable development that has recommended the federal government establish mortgage savings accounts, among other policy changes to support home buyers.
But federal legislation to establish such accounts, with contributions that may be deducted on federal income tax returns, hasn’t advanced far in Congress. Lawmakers are currently focused on finalizing major tax legislation that, among other things, may scale back the long-popular home mortgage interest deduction.
Here are some questions and answers about saving for a down payment:
How much of a down payment do I need to buy a home?
A 20 percent down payment is usually necessary to avoid paying private mortgage insurance premiums, which add to borrowing costs. But buyers often can put down much less if they’re willing to take on insurance. The typical down payment for first-time buyers this year was just 5 percent, the National Association of Realtors reported.
There are also options for even lower down payments. Loans insured by the Federal Housing Administration, for instance, have down payments as low as 3.5 percent, and some lenders are offering mortgages with 3 percent down payments, if you qualify.
Are there programs offering down-payment assistance?
Many state and local governments, as well as nonprofit organizations, have programs that offer grants or loans to help first-time buyers with down payments. But potential borrowers are often unaware such help exists or assume they don’t qualify, according to a recent report from the Urban Institute’s Housing Finance Policy Center. The amount of assistance is based on factors like the loan amount, the borrower’s income and family size.
A good place to start is by contacting your state’s housing finance agency. Also the Down Payment Resource website can help match borrowers with assistance programs for which they may qualify.
Where can I get information about down payments and the home buying process?
The Consumer Financial Protection Bureau offers a guide on its website.
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