The New Jersey Legislature is considering a bill that would establish a savings account program to assist first-time homebuyers in saving for a down payment, according to the Philadelphia Business Journal.
The program would draw funds from participants’ pre-tax income, similar to tax-advantaged 529 plans for education savings and health savings accounts for medical care.
- Savings withdrawn for purposes other than a home purchase would be taxed, NewsWorks reported. The maximum amount of funds allowed in the account has yet to be announced.
New Jersey isn’t the first state to consider such a program, although few states offer them. In Virginia, first-time buyers can set aside $50,000 tax-free toward closing costs on a new home through its First-Time Homebuyer Savings Program, which launched in 2014. Montana has offered a similar program since 1998, but it has seen limited uptake among buyers in the state, in part due to low interest rates and the availability of alternatives that provide matching funds or other incentives, according to The New York Times.
Among the programs serving up bigger financial returns is the Federal Home Loan Bank of New York’s First Home Club, which matches dollars saved toward the purchase of a home for buyers in the region earning 80% of their county's median income. Other matched-savings programs like Individual Development Accounts, offered through the Washington, DC-based Corporation for Enterprise Development, include options for home purchases.
These programs aim to help new buyers overcome one of the biggest hurdles to homeownership: affording the down payment. In a January report, Zillow noted that a 20% down payment on a median-priced home in the U.S. requires more than two-thirds of average buyers’ annual incomes. First-time buyers often rent prior to purchasing and lack the equity from the sale of a previous property, which can make amassing those savings a challenge, especially in an environment of steadily rising home prices.
Loans backed by the Federal Housing Authority typically offer lower interest rates and are more flexible regarding buyers’ credit scores. A report this week from Ellie Mae indicated that they may be gaining interest among millennials, most of whom are purchasing their first home. FHA loans made up 35% of the home loan market in January, a one percentage point increase from December. Millennials took an 84% share of new-home mortgage loans closed during the month.
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