How Individual Development Accounts Can Promote Homeownership
As part of National Homeownership Month, this week Prosperity Now’s Affordable Homeownership team released a review of existing research to examine how matched savings programs like individual development accounts (IDAs) can be used as downpayment assistance tools and bring homeownership within reach for many Americans. Below, we summarize some of the key takeaways from each of the literature review’s five sections. You can find a copy of the full report here.
Benefits of Homeownership
The review begins by looking at some of the benefits of homeownership, highlighting how mortgages are generally just as affordable as rent payments across the country and, in some markets, are even more affordable. Additionally, we identify how the wealth-building aspects of homeownership can be particularly powerful to reduce the racial wealth divide.
Barriers to Homeownership
Several barriers to homeownership were identified, including a lack of or poor borrower credit, debt burdens and affordability. We also examine how some barriers are amplified or unique to households of color, such as discriminatory zoning laws, predatory lending and lack of affordable housing in urban areas. In particular, however, current research suggests that homeownership is a major barrier not just due to difficulties in saving but also because of misconceptions about how much is actually needed for a mortgage.
With downpayments identified as a major homeownership barrier, we also explore the state of downpayment assistance in the US. The largest form of downpayment assistance in the country comes in the form of gifts and loans from families, which is significantly more common among White families than it is for Black and Latino households. Therefore, public downpayment assistance programs may be particularly helpful for reducing homeownership disparities. However, though many forms of downpayment assistance programs exist across the country, there is a distinct lack of standardization among these programs, unlike the national guidelines for IDAs.
Individual Development Accounts
The Assets for Independence Act (AFI) established a national set of guideless for IDA programs, with the most common use of IDAs within this program being for downpayments. While the current research on IDA program outcomes is mixed, due largely to a lack of long-term studies, there is some evidence to suggest that IDA program participation is a positive predictor of homeownership, particularly for low-and moderate-income families. Additionally, there is some evidence among IDA participants of other benefits beyond just the downpayment, such as lower foreclosure rates and greater confidence in one’s ability to meet their financial goals.
Discussion and Next Steps
The elimination of AFI funding was a significant blow to IDA programs across the country. However, it also brings the opportunity to think about how a future program could build on where AFI was successful and rework the less-effective aspects. Some important features found to affect program outcomes include a match rate of 3:1, inclusion of financial education, higher maximum match amounts and built-in program flexibility to accommodate unexpected financial needs, among others. To this end, we recommend further research into IDA program design to specifically explore how future programs can best facilitate successful homeownership.