Senior Loan Officer | NMLS #316198
Branch NMLS #1270689
Posted On July 17, 2018
As home prices and down payment requirements rise proportionately, the housing market has seen a significant decline in first-time home buyers entering the market. In 2017, first-time home buyers accounted for only 32% of all buyers, according to the National Association of Realtors (NAR), much less than the long-term average ratio of 40%. With renters struggling to save for the down payment on a home, even with low down payment options, some states are offering tax incentives for “first-time home buyer savings accounts.”
As of this year, about eight states currently offer tax advantages for down payment savings accounts, with several more considering enacting similar programs. Senior policy analyst for the Tax Foundation in Washington, Jared Walczak explains, “the accounts are designed to provide renters with a tax-advantaged opportunity to save for their down payment. In some states, it’s not just for first-time buyers, but for those who haven’t owned a home in a number of years.”
Limited available homes for sale is driving home prices up around the country, especially in some heated metros. The S&P CoreLogic Case-Shiller home price index appreciated 6.4% year-over-year in April, led by double-digit annual gains in Seattle, Las Vegas, and San Francisco. As home prices rise, so do down payment requirements. According to a National Association of Realtors survey, the top expenses delaying homeownership are student loans, credit cards, and car loans, followed by childcare and healthcare costs. 49% of all potential home buyers and 53% of buyers aged 37 and younger reported student loans as the top impediment to buying a home. First-time home buyer savings accounts could be one way to alleviate the national student loan debt. They function similarly to 529 college savings plans, in that the funds must be used toward the down payment and closing costs and cannot be used toward other purchases.
According to the Mortgage Reports, Colorado, Iowa, Minnesota, Mississippi, Montana, and Virginia currently offer tax incentives for down payment savings programs. Montana was the first state to offer an incentive, starting in 1998. CNBC announced Oregon and Alabama have also added programs this year. Incentives vary from state to state and have different requirements. The Oregon program, for example, will allow individuals to deduct up to $5,000 and married couples filing jointly to deduct up to $10,000 starting in 2019. In most cases, the accounts are not limited to the home buyer. Parents or grandparents can open accounts on behalf of their children or other family members. Some opponents of the first-time home buyer savings accounts suggest that the accounts could be used as tax shelters for the wealthy. However, because of the down payment and closing costs restrictions, the funds must be used toward home purchases.
While saving for a down payment is the top-reported obstacle to homeownership, financial institutions and housing authorities are looking for ways to make buying a home more affordable, especially for first-time home buyers. Traditionally, many potential home buyers believe the 20% down payment is required to purchase a home. A larger down payment can help offset the cost of mortgage insurance and secure a better interest rate, but it is not required. Some loan programs have down payment requirements as low as 3%.
HomeFundItTM by CMG Financial is another way to increase down payment savings. HomeFundIt users have the option to self-fund from their savings and collect additional contributions from family and friends. All contributors have the option to give conditional or non-conditional gifts. Conditional gifts will be returned to the contributor, if the HomeFundIt user does not end up purchasing a home.
When you are saving for a down payment, it’s best to consult a mortgage professional to set a realistic goal and explore all of your options. With over 2,500 down payment assistance programs available nationwide, homeownership may be more achievable than you think.