Owning a home is a quintessential part of the American dream. However, home ownership has become increasingly difficult as home prices have risen disproportionately faster than incomes. 

That’s where a First Time Home Buyer Savings Account comes in. An FHSA is a specific type of savings account designed to help first-time home buyers save for their down payment, closing costs, and other expenses related to purchasing their first home. 

These accounts are tax-advantaged, meaning neither your deposits nor any earnings on those deposits are subject to being taxed.  

FHSAs are meant to make it easier for individuals buying their first home to save the funds they need to make a down payment. They also offer closing cost assistance for additional costs related to buying your first home. 

Some states offer tax credits and incentives to encourage people to open these accounts, and some federal tax benefits are also available for first-time homebuyers.

If you are considering buying your first home, a first-time home buyer savings account might be a good option. These types of down payment assistance programs can help you save money on taxes, and they can also help you save money for your down payment and other homebuying expenses.

Before you open an account, however, it is essential to do your research and ensure that you are cognizant of the rules and regulations for these accounts.

Understanding First-Time Home Buyer Savings Account

What Is It & Who Can Open One?

An FHSA is a tax-advantaged savings account that allows individuals and joint filers to save up to $15,000 and $30,000 a year, respectively, for the eventual purchase of their first home. The annual savings can be deducted from their state-taxable income, and limits on the account vary by state.

The funds in an FHSA must be used for homebuying expenses. These expenses include the down payment, closing costs, and other expenses such as title insurance, appraisal fees, and home inspection costs. If the funds are used for any other purpose, the withdrawal may have penalties and taxes.

Only a select number of states offer FHSA accounts now, and each state may have different rules and regulations regarding the accounts. Some states may require a minimum balance to be maintained in the account, while others may have restrictions on what type of homes can be purchased using the funds.

Eligibility Criteria for Account Holders

To open a First Time Home Buyer Savings Account, an individual must meet the following eligibility criteria:

• Be a resident of a state that offers First Time Home Buyer Savings Accounts. Only Alabama, Colorado, Idaho, Minnesota, Mississippi, Montana, Oregon, and Virginia offer these accounts, although legislation is planned or under discussion in other states.
• Be a first-time home buyer, which the IRS defines as an individual who has not owned a principal residence in the past three years.
• Be a qualified beneficiary, which means that the account holder must designate a beneficiary who will use the funds in the account to purchase a qualified first-time home. The designated beneficiary must also meet the eligibility criteria for first-time home buyers.
• Be an account holder, which requires opening and maintaining a First Time Home Buyer Savings Account at a qualified financial institution.

Please note that each state may have additional eligibility criteria and requirements, so it’s imperative to research the specific rules and regulations for the state where the account holder resides.

We also recommend consulting a local tax advisor or personal tax CPA to understand all the nuances and implications of opening and maintaining an FHSA regarding your state taxes and federal taxes.

How to Open a First Time Home Buyer Savings Account

Choosing a Financial Institution

Not all banks and/or credit unions offer an FHSA, so choosing one that does offer it is the first step. Some factors to consider should be the interest rate offered on the account, any fees associated with the account, and the convenience of the institution’s location and online banking services.

It may also be helpful to check out reviews and get feedback from family and friends who have gone through the process. 

Steps to Open an Account

Once you’ve picked the bank, opening your FHSA is a straightforward process.

1. Gather the necessary documentation: To open an account, you’ll need to provide some basic personal information, such as your name, address, and Social Security number, as well as proof of income and employment.
2. Fill out an application: The individual must fill out an application for the first-time home buyer savings account. This may be done online or in person at the financial institution’s branch.
3. Make an initial deposit: To open the account, the individual will need to make an initial deposit. The initial amount will vary depending on the bank, but it is typically small.
4. Set up automatic contributions: To make the most of the first-time home buyer savings account, it is recommended that you set up automatic contributions. This will help you reaching your saving goal faster through consistency. 
5. Monitor the account: Once the account is open, monitor it regularly to ensure that you’re on track to reach your savings goals.
6. Consider setting up alerts or reminders to ensure you don’t miss any contributions or deadlines.

In addition to a first-time home buyer savings account, some financial institutions may also offer checking and other savings accounts to help you save for your first home purchase.

Contributions to Your Account

Contributions to FHSA are subject to specific limits. The maximum annual contribution limit varies by state, but it is usually around $5,000 annually. Some states also have a lifetime contribution limit, typically between $50,000 and $150,000.

Furthermore, contributions to FHSA are not tax-deductible at the federal level. However, some states offer state tax deductions or credits for contributions to these accounts. It is recommended to check with a tax professional or a personal tax CPA to understand the tax implications of FHSA contributions.

There are several methods to transfer funds into an FHSA. The most common methods include:

• Direct deposit is the easiest and most user-friendly way to transfer funds into an FHSA. This can include setting up a direct deposit directly from y our paycheck or bank account to automatically transfer funds into the FHSA.
• Electronic transfer: You can also transfer funds from your bank account to the FHSA.
• Check: Mail a check to the bank that manages the account.

Finally, contributions to FHSA must be made in cash. Contributions made in-kind, such as stocks or property, are not allowed.

Benefits of an FHSA

One of the most significant benefits of an FHSA is the tax benefits. Contributions to an FHSA are tax-deductible, meaning that the account holder can deduct the contributions from their taxable income on their tax return.

Additionally, the interest and earnings generated from the account are non-taxable as long as the funds are used for qualified homebuying expenses.

Another key benefit of an FHSA is the interest and earnings benefits. The interest rates on these accounts can be higher than other savings accounts, which lets you earn more interest on your savings. Some FHSA accounts may even offer dividends, which can further increase the earnings potential of the account.

By taking advantage of tax-deductible contributions and non-taxable interest and earnings such as capital gains, account holders can save more money for their home purchases.

Using Funds from First Time Home Buyer Savings Account

A first time buyer can use the funds in their First Time Home Buyer Savings Account to pay for eligible costs and expenses such as down payments and other upfront costs.

These eligible costs and expenses may include down payments, closing costs which are the fees associated with the closing sale of a home, and other qualified costs, such as home inspection or mortgage application fees.

To withdraw funds, the first time home buyer must follow the qualifying withdrawal steps, which include:

1. Provide documentation: You must provide documentation showing that the funds will be used for an eligible expense, such as a down payment requirement associated with purchasing a home.
2. Request a withdrawal
3. Receive the funds and use them towards eligible expenses such as your down payment and closing costs.

The withdrawal may be subject to taxes and penalties if the funds are not used for an eligible expense associated with purchasing a home. 

Penalties and Fees for First Time Home Buyer Savings Account

Understanding Penalty

Future homeowners must understand that if the funds in the FHSA account are not used for the intended purpose, there may be penalties and fees associated with the account.

The penalty for withdrawing funds from an FHSA for non-qualified expenses varies by state, but generally ranges from 5-10% of the withdrawal amount. You may also have to pay taxes on your withdrawal.

Service Fees

In addition to penalties for early withdrawal, some FHSA providers may charge service fees for maintaining the account. These fees can vary between different providers and may include monthly maintenance fees, account closure fees, or other charges.

Individuals need to research and compare FHSA providers to clearly understand the various fees associated with each account. Some providers may offer fee waivers or other incentives to attract new customers, so a first time buyer should shop around for the best deal.

Investment Options

When investing in a First Time Home Buyer Savings Account, various investment options are available. One popular option is mutual funds. Mutual funds are investment portfolios managed by professionals that gather capital from numerous investors to acquire a varied assortment of stocks, bonds, and other securities.

Please note that the ability to invest FHSA funds in mutual funds depends on the specific rules and regulations of the account.

Not all types of these accounts may permit investment in mutual funds or other securities. Rules can vary by state and banks, so anyone considering opening such an account should verify what investment options are allowed.

Understanding Deposits in An FHSA

When a deposit is made to a first-time home buyer savings account, it is crucial to keep track of the amount deposited and the date of the deposit. This information will be necessary when it comes time to claim the tax benefits associated with the account.

At the time of purchase, the settlement statement must show that the funds used for the down payment and closing costs came from the FHSA.

Deposits made to a first-time home buyer’s savings account are subject to a lifetime contribution limit. This limit varies by state, so checking with the specific state’s guidelines is essential. For example, in Oregon, the lifetime contribution limit is $50,000.

Finally, it is worth noting that some first-time home buyer savings accounts may be converted to a Registered Retirement Income Fund (RRIF) following the account holder’s 71st birthday. This can provide additional tax benefits, but it is imperative to have clarity about the rules and regulations surrounding RRIFs before making any decisions.

First Time Home Buyer Savings Account in Virginia

In Virginia, the FHSA program was established in 2015, and it is available to all Virginia residents who are a first time home buyer or have not owned a home in the past three years.

To qualify for the FHSA program, the first time buyers must use the funds for a qualified home purchase, including purchasing a single-family home, townhouse, condominium, or cooperative unit in Virginia. The home must also be the account holder’s primary residence. It cannot be used to buy land or commercial property.

The FHSA program has certain restrictions. For example, the account holder must be a Virginia resident, and the account must be opened before the individual’s 40th birthday.

Additionally, the account cannot exceed $150,000 in principal and interest, and any funds withdrawn for non-qualified purchases may incur taxes and penalties.  

Frequently Asked Questions

What is a first-time home buyer savings account?

A first-time home buyer savings account is a particular type of savings account that helps people save money for their first home purchase. These accounts are offered by some states in the US, and they come with numerous benefits that can help people save money more quickly and efficiently.

How does a first-time home buyer savings account work?

When you open a first-time home buyer savings account, you can deposit funds into it regularly. Some states offer tax benefits for these accounts, which can help you save money on your taxes while you save for your home purchase. Once you have saved enough money, you can use the funds in the account to help pay for your down payment, closing costs, and other expenses associated with buying a home.

What are the benefits of a first-time home buyer savings account?

There are several benefits to having a first-time home buyer savings account. These accounts typically offer tax benefits, which can help you save money on your taxes while you save for your home purchase. Additionally, some states provide matching funds or other incentives to help you save more quickly and efficiently.

Are there any tax benefits to having a first-time home buyer savings account?

Yes, some states offer tax benefits for first-time home buyer savings accounts. For example, in Oregon, contributions to these accounts are tax-deductible up to a certain amount each year. Additionally, some states offer tax-free growth on the funds in these accounts, which can help you save money on your taxes over time.

What are the eligibility requirements for a first-time home buyer savings account?

The eligibility requirements for a first-time home buyer savings account vary depending on the state. In general, you must be a first-time home buyer, and you may need to meet specific income or residency requirements. Some states also require that you use the funds in the first time homebuyer account to purchase a home in that state.

Which states offer first-time home buyer savings account programs?

As of August 2023, several states offer first-time home buyer savings account programs, including Oregon, Iowa, Minnesota, Colorado, Montana, and Mississippi. The eligibility requirements and benefits of these programs vary by state, so it is vital to research the details of each program before opening an account.