A Win-Win for First-Time Home Buyers

Pending legislation could benefit many Iowans.

In Iowa the percentage of home sales attributed to first-time buyers has dropped steadily since the housing bubble burst in 2008. If a bill before the Iowa Senate passes, that trend could begin moving in the other direction. And that’s just one of the goals, according to the Iowa Association of Realtors® (IAR).

Eliminate barriers

“One of the most significant barriers to home ownership for young people is coming up with the down payment,” Scott Wendl of ReMax Real Estate Concepts and treasurer of the IAR says. “With college debt and other factors, young people have a hard time saving enough.”

According to the IAR, “Rising household debt, credit concerns, and affordability challenges make saving for a down payment a major hurdle to home ownership.”

The proposed bill, known as the First-Time Home Buyer Savings Program, helps address that concern.

“Parents and grandparents as well as young people can contribute to the account,” explains Ken Clark of VIA Group, Realtors, and past president of the IAR. “And those funds can be withdrawn tax-free as long as they’re used for a down payment or associated fees to purchase a home.”

Modeled after the College Savings Iowa 529 Plan, the First-Time Home Buyer bill was initially proposed several years ago by the IAR and state legislators.

“Both previous versions passed the House but didn’t make it through the Senate for various reasons,” Clark says.

This year’s bill, which has been revised to address some of the previous objections, unanimously made it through subcommittee and is being reviewed by the Ways and Means Committee.

Clark says, “We’re really hopeful about this one. The committee passed a companion bill so that the First-Time Home Buyer bill could continue through the legislative process and not miss the deadline for this session.”

Encourage ownership

As a result of assisting young people with savings, the IAR believes this program will encourage more young people not only to buy rather than rent, but it will offer one more motivation for them to stay in Iowa.

Des Moines continues to appear on various “hottest cities” lists and is a growing market for millennial buyers. That has not always been the case, and Iowa has traditionally struggled to retain its young people and have them call the state home.

“This bill provides an added incentive for young buyers to stay in the state,” Clark says. “If you have two different job offers, and one is in Iowa, where you can use that savings tax-free to buy a reasonably priced home, you’re more likely to pick the job in Iowa over the one in a higher-priced market where you don’t have that benefit.”

Although the current bill states that funds can be withdrawn at any time, if they are not used for the purchase of a home in Iowa, penalties will apply.

Stimulate Iowa’s economy

The effects of this bill will reach far beyond the first-time buyer. Despite some legislators’ concern that the program will cost the state tax revenue, Wendl says it will actually have the opposite effect.

“It’s an investment in the state, not a cost to the state,” he explains. “Every time a home sells, nearly $50,000 in additional money is pumped into the economy in the form of associated fees and purchases.”

Besides the necessary costs—Realtor fees, inspections, filing fees, and the like—most home sales also trigger additional economic investments, including paying movers, purchasing furnishings, even renovating the purchased home.

The IAR estimates that over 3,300 first-time buyers will participate in the program during the first five years. With 95 percent purchasing existing homes and the remaining 5 percent choosing new construction, over the same period that’s a projected $165 million injected into Iowa’s economy on top of the real estate purchases.

“There are numerous benefits to this program,” Clark says. “But we’re focusing on the benefit to homeowners. That’s why we do what we do.”

“People who own homes rather than rent are more likely to stay in a community, their children are more likely to attend college, and their net worth tends to be significantly higher,” Wendl adds.

Those are benefits to the state of Iowa as well, reaching far beyond that first-time home buyer who invests in a savings account. If passed, this legislation will ultimately be an investment in the future and the long-term growth of our economy as well as our population.

Proposed First-Time Home Buyer Savings Plan

These are highlights of the bill, as stated by the Iowa Association of REALTORS®.

  • Creates a new state income tax exemption for qualified deposits to a First-Time Home Buyer Savings Account.
  • Assets of the savings account are to be used for the down payment and allowable closing costs associated with the purchase of a home.
  • Withdrawals from the account are tax-free as long as the money is used for a down payment and closing costs for a single-family, owner-occupied home in Iowa.
  • A first-time home buyer—as well as parents and grandparents of a first-time home buyer—would be able to receive an income tax exemption for savings up to approximately $2,000/year for up to 10 years, or $4,000/year for two first-time home buyers who file taxes jointly, with a maximum of $20,000.
  • The first-time home buyer is required to set up an account with an Iowa bank or credit union.