During the last decade and a half, homeownership in the US steadily declined. In fact, from 2014 onwards, the percentage of Americans who own a house remained at its lowest levels since 1995. Because of this, many people are considering a first-time home buyer loan.
The US economy is very strong. Unemployment is low, stocks keep reaching record heights, and businesses are growing at a healthy rate. Nonetheless, this made it very easy to overlook the dire state of the housing market, which arguably never recovered from the Great Recession. This especially impacts college graduates, low-income communities, and highly-indebted households.
On the plus side, there are many reasons to be optimistic about the future. States across the country are now offering first-time home buyer loan programs. These savings accounts come with minimal tax burdens. In addition, consumers can invest their funds and watch them grow. Not only does this help with the down payment, but the profits from investments increase the chances that a lender will approve your mortgage application.
Your Income and Savings
A first-time home buyer loan and savings account can boost your income. It also makes it easier to take care of the down payment.
Why? Because you can invest your money and cultivate it.
For example, a recent college graduate wants to purchase property for $150,000 in two years. At a ten percent down payment, the aspiring homeowner would pay $15,000.
In order to do so, they have to save over $500 per month. However, here is where the first-time home buyer loan savings account comes in handy.
When the monthly deposits are invested, the college graduate’s balance keeps appreciating in its own respect. A 20% annual return (or 40% over two years) would cover almost half of the down payment amount.
Therefore, instead of saving $500 per month, the account holder only needs to contribute $300 because the investments will take care of the rest.
Just as importantly, these gains can be counted as part of the mortgage applicant’s earnings. By lowering their debt-to-income ratio, the college graduate can even qualify for a lower down payment and interest rate.
This opens the gates for additional savings and benefits.
First-Time Home Buyer Loan: Tax Benefits
Your house-purchase savings come with many tax advantages on both the federal and state levels.
Firstly, after buying a home, consumers can deduct interest payments from their federal tax returns. While the 2017 Tax Cuts and Jobs Act puts a cap on this, a first-time home buyer loan enables property owners to count interest expenses towards their standard deduction.
In fact, the new tax law expanded the maximum-deductible amount for married couples and individuals. They can use up to $24,000 and $12,000 in deductions, respectively.
Second, state or local property taxes may also go towards the standard deduction. This is especially important because property levies are amongst the most burdensome taxes in the country.
Consumers might qualify for state-level credits or deductions, as well. This, however, depends on where they live.
Critics of the first-time home buyer loan savings bring up several points. The account, in itself, is too risky. If someone has an emergency, for instance, and they withdraw money, there is a five to ten percent penalty.
Moreover, what happens when the stock market goes down? The aspiring homeowner may have to contribute additional money to make up for the losses.
This is especially true for those who want to close within two to three years. They have less room and time to recover from downturns.
While these concerns are legitimate, addressing them is not that difficult. When we weigh them against the benefits of having a first-time home buyer loan, the problems become even more insignificant.
Withdrawing money from the fund doesn’t always come with a hefty penalty. Some states only require consumers to pay their regular tax rate on any amount that is not used for mortgage-related expenses.
Similarly, cautious and careful planning allows you to steer clear from this potential shortcoming. Figure out how much emergency fund savings you may need and create a separate account for that.
Likewise, thoroughly researching potential investment ideas can go a long way. Consumers who take their time when they study the financial markets are more likely to be profitable.
Those who manage their risk and define maximum loss limits are on the same boat. It is relatively easy for them to weather through sell-offs and volatile conditions.
What You Need to Know
A first-time home buyer loan allows you to save money, grow your savings, and qualify for plenty of tax benefits.
However, just as with any major endeavor, aspiring homeowners must control their risks and give their investments the attention and dedication that they deserve.
Purchasing property requires plenty of discipline and careful planning, to begin with. The first-time home buyer loan creates many opportunities for responsible consumers who are ready to take that step.