Similar to a 529 Plan, the American Dream Down Payment Act would help homebuyers save 20% for a down payment in a state-managed savings account
Just ahead of what some real estate experts are predicting will be a robust fall homebuying season, Senators Cory Gardner (R-CO) and Doug Jones (D-AL) are aiming to help aspiring homeowners overcome the financial barrier of saving for a down payment with the American Dream Down Payment Act of 2020.
“A down payment on a home can be a significant barrier to becoming a homeowner,” Gardner said in statement. “Inspired by the popular 529 education savings accounts, this bipartisan bill will make it easier for people to save for a down payment, which will aid both our unique housing challenges in Colorado and our economic recovery from the COVID-19 pandemic.”
Proposed earlier this month, the ADDPA would allow states to establish and manage down payment savings accounts for homebuyers. Homebuyers can save up to 20 percent of today’s median housing cost or $102,080 — an amount that would rise with inflation. Family and friends can contribute to the account, which can be used for a down payment or other related housing costs without penalty.
The Securities and Exchange Commission would set standards for the investments of eligible accounts and allowable fees, the senators explained.
Although homebuyers can offer as low as 3.5 percent down with FHA loans, the coronavirus and the ensuing unemployment crisis has pushed lenders to raise minimum credit scores, require greater down payments, and evidence of a six-month savings reserve — a hard task for most Americans.
The National Association of Realtors, The Colorado Association of Realtors, the National Association of Real Estate Brokers and the CBC Mortgage Agency showed support for the plan, saying it could make homeownership more accessible for lower-income and minority buyers.
“The ability to accumulate tax-free savings funds breaks down/eliminates one of the most prominent barriers to achieving homeownership, the down payment,” NAREB National President Donnell Williams said in a joint statement with CAR CEO Tyrone Adams. “This Act serves as a tangible springboard to increase Black homeownership and real wealth-building prospects which the National Association of Real Estate Brokers includes in the meaning of its time-honored slogan, Democracy in Housing.”
“The resiliency of our residential real estate market has been one of the few bright spots of America’s economy during this pandemic, but numerous would-be homebuyers are finding it difficult or impossible to save the money needed for a down payment on a home,” NAR President Vince Malta added in a separate statement. “Modeled on the very popular 529 education savings account concept, the American Dream Down Payment Act would allow savings for the down payment of a principal residence to grow tax-free, offering a responsible and commonsense approach to the multi-faceted problem of housing affordability in America.”
The ADDPA comes on the heels of Rep. Sean Mahoney’s (NY-18) First Time Homebuyer Pandemic Savings Act, which allows first-time buyers to use funds from their retirement accounts “under the umbrella of coronavirus-related distributions” for a down payment. Withdrawals under $25,000 will be tax-exempt and penalty-free.
The FTHPS Act builds on current CARES Act provisions for new and repeat homebuyers that allow them to withdraw up to $100,000 of their 401(k) balance penalty-free until the end of 2020.
Although both Acts have garnered robust support within the industry, financial experts say both pieces of legislation have their risks, including encouraging buyers to sacrifice retirement or other long-term savings.
“Most Americans are undersaved for emergencies and retirement, and further, the idea of owning a home often leads would-be home buyers into financial tunnel vision — focusing all efforts and resources on acquiring the home and seeing it as the end-all, be-all of financial and emotional utopia,” Bankrate Chief Financial Analyst Greg McBride said. “The unintended consequence is that this prompts even diligent savers to cut back or halt saving for retirement or emergencies in order to accumulate a down payment on a tax-advantaged basis.”
Both Acts are still in the introduction stage and will be passed to respective committees for further action.