What a first-time homebuyer savings account is

A first-time homebuyer savings account is a dedicated savings account that lets you set money aside for a down payment on your first home while getting a tax break. The account itself works like a regular savings account — you deposit money, it sits there earning a small amount of interest, and you can withdraw it. The difference is that when you withdraw the money to buy your home, you do not pay federal income tax on the interest you earned, and in some cases you do not pay tax on the money itself.

These accounts go by different names depending on where you live and which bank offers them. Some states call them First-Time Homebuyer Savings Accounts, others use Down Payment information Savings Accounts, and a few offer them under state-specific names. The rules vary by state and by bank, so what one bank offers may be different from what another offers in the same state.

The basic idea is straightforward: the government wants to encourage people to buy homes, so it removes the tax penalty that normally applies when you earn interest on savings. This makes it easier for you to grow your down payment fund without losing part of it to taxes.

Key Takeaways

  • A first-time homebuyer savings account lets you save for a down payment while avoiding federal income tax on the interest you earn.
  • These accounts are offered by individual states and banks, not by the federal government, so availability and rules depend on where you live and which bank you use.
  • You must be a first-time homebuyer — usually meaning you have not owned a home in the past two years — to open and use one of these accounts.
  • The money must be used for a down payment, closing costs, or other home-purchase expenses within a set time frame, usually three to five years.
  • If you withdraw the money for any other reason before the important date, you will owe taxes on the interest and may face a penalty.

Who can open a first-time homebuyer savings account

To open one of these accounts, you must meet your state's definition of a first-time homebuyer. In most states, this means you have not owned a home in the past two years. Some states are stricter — they may require that you have never owned a home at all, or that you are a single parent, or that your household income falls below a certain level.

A few states also require that you be a resident of that state to open the account. Some banks that offer these accounts may have their own additional rules, such as a minimum deposit amount or a requirement that you have a checking account with them already.

The best way to find out whether you can open one is to contact banks in your state directly or to check your state's housing finance agency website. Your state's housing finance agency is a government office that oversees homeownership programs — you can find it by searching "[your state name] housing finance agency."

How much you can save and how long you have

The amount you can deposit each year varies by state. Some states set a limit of $2,500 per year, others allow $5,000 or more, and a few have no annual limit at all. The total amount you can hold in the account also varies — some states cap it at $15,000, others at $30,000 or higher.

You have a set window of time to use the money, usually between three and five years from when you open the account. If you do not buy a home within that time frame, you must close the account and withdraw the money. When you do, you will owe federal income tax on all the interest you earned, plus a penalty in most cases.

Some states let you extend the important date if you have not found a home yet, but you have to ask before the original important date passes. Check with your bank or state housing finance agency about extension rules in your state.

What the money can be used for

The money in your account can be used for a down payment on your first home — that is the main purpose. But most programs also let you use it for closing costs, which are the fees charged by the lender and other parties when you finalize the loan. These include things like appraisal fees, title insurance, and attorney fees.

Some states also allow you to use the money for home inspection costs, property taxes, or homeowners insurance that is due at closing. A few allow it for repairs that must be done before the lender will approve the loan. The exact list depends on your state and your bank, so ask before you assume a particular cost is covered.

You cannot use the money for anything else — not for renovations after you buy, not for moving costs, not for furniture. If you withdraw money for a non-may have access to expense, you lose the tax benefit on all the interest you earned and usually pay a penalty as well.

How the tax benefit works

When you withdraw the money to buy your home, the interest you earned is not subject to federal income tax. This is the main advantage of the account. If you had saved the same amount in a regular savings account, you would have had to pay federal income tax on the interest at your normal tax rate.

The tax benefit applies only to the interest, not to the money you deposited yourself. If you deposited $10,000 and earned $500 in interest, the $500 is tax-free when you withdraw it for a home purchase. The $10,000 was never taxed anyway because it came from money you already earned and paid taxes on.

Some states also offer a state income tax deduction for the money you deposit into the account each year. This means you can subtract your deposits from your state taxable income, which lowers the state income tax you owe. Not all states offer this, and the rules vary, so check with your state tax authority or your bank.

What happens if you do not buy a home

If you do not buy a home within your state's time frame — usually three to five years — you must close the account and withdraw the money. When you do, you will owe federal income tax on all the interest you earned. You will also owe a penalty, which is usually 10 percent of the interest, though some states have different rules.

This is why it is important to be realistic about your timeline before you open the account. If you are not sure you will buy a home within the next few years, a regular savings account might be a better choice, even though you will pay tax on the interest.

A few states allow you to roll the money over into a new account if you miss the important date, but this is rare. Most require you to withdraw everything and close the account. Some states also let you pause the clock if you have a documented reason, such as a job loss or medical emergency, but you have to request this before the important date.

Finding and opening an account in your state

Not every state offers a first-time homebuyer savings account, and not every bank in a state that offers them will have one. To find out what is available to you, start by searching "[your state name] first-time homebuyer savings account" or visiting your state's housing finance agency website.

Once you find a bank that offers the account, you will open it much like you would open any other savings account. You will need to provide proof of identity, proof of address, and your Social Security number. You will also need to sign a form confirming that you are a first-time homebuyer under your state's definition.

Some banks let you open the account online, others require you to visit a branch in person. Ask about the minimum deposit required — some banks want you to deposit money right away, others let you open the account with no initial deposit and start saving whenever you are ready.

Frequently Asked Questions

Can I open a first-time homebuyer savings account if I am married and my spouse owned a home before?

It depends on your state's rules. Some states require that both spouses be first-time homebuyers, while others allow one spouse to have owned a home as long as the other has not. A few states define "first-time homebuyer" based on the household rather than the individual. Contact your state's housing finance agency or the bank offering the account to find out which rule applies where you live.

What if I open the account but then lose my job and cannot save enough for a down payment?

You can withdraw the money without penalty if you have a documented hardship, such as job loss, medical emergency, or death in the family. The rules vary by state and bank, so ask about hardship withdrawal options when you open the account. You will still owe federal income tax on the interest, but you may avoid the penalty.

Can I use money from a first-time homebuyer savings account to buy a second home later?

No. The account is for your first home only. Once you buy a home using money from the account, you are no longer a first-time homebuyer, and you cannot open another account. If you buy a second home later, you would need to use a regular savings account or other savings method.

Does opening a first-time homebuyer savings account affect my credit score?

Opening a savings account does not affect your credit score. Savings accounts are not reported to credit bureaus the way credit cards and loans are. The account will not help your credit, but it will not hurt it either.

What interest rate will I earn on the money in the account?

Interest rates vary by bank and change over time. When you open the account, ask the bank what rate they are currently offering and whether it is fixed (stays the same) or variable (can change). Compare rates at different banks before you decide where to open your account, just as you would with any savings account.