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How an Individual Development Account Works

How an Individual Development Account Works

  • How an Individual Development Account Can Help You Buy a Home
  • An Individual Development Account, or IDA, can be a helpful tool to help you buy a home.  In short, the funds you deposit in an individual development account are matched by a sponsoring organization, company or donor.  Matching the money you put into the account enables you to grow your savings faster.  For example, every dollar you save may result in two dollars in your account.  Not only do you have more money in your account, but a higher balance means you earn more interest income.  Because interest compounds over time, the more money you have in your account, the faster your balance grows.   

    IDAs are usually set-up as a savings vehicle with a specific purpose or goal, including to purchase a home. For example, you can use the proceeds from an account to help pay for the down payment on a home or to pay for closing costs. Saving money for a down payment or closing costs can require thousands of dollars and is one of the biggest obstacles to owning a home so an IDA can be very beneficial, especially for first-time home buyers. In short, an individual development account make home ownership more accessible or may enable you to buy a home faster than you thought.  The savings boost provided by an account is especially valuable for borrowers with low-to-moderate incomes or limited financial resources.

    Programs have relatively strict qualification guidelines and eligibility requirements.  Read the information below to understand how IDAs work, if you qualify for a program and how to open your account.  When used correctly, an Individual Development Account can help you unlock the door to home ownership, even if you never thought it was possible. 

    Use the FREEandCLEAR Lender Directory to find lenders that offer many no or low down payment mortgage programs.  Combining an IDA with a low down payment program makes buying a home more affordable.

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  • How IDAs Work
  • An Individual Development Account is a special savings account for people with low incomes. When you deposit funds into an IDA, your money is matched with donations. That means that you can receive another dollar or more for every dollar you save in an account.  Programs match each dollar you save with additional funds from donors. Many programs offer a 1:1 match rate, which means that for each $1 you deposit in your IDA, $1 in matching funds will be added to your savings. Depending on the program, though, match rates can be more or less.

    IDA savings and match money can be used for multiple purposes including buying a house, paying for education or job training or starting a small business.

  • What Organizations Sponsor Individual Development Accounts?
  • Match dollars for Individual Development Accounts come from many different places, such as government agencies, private companies, churches, or local charities. Any individual, organization or business can contribute match dollars to an account. In most cases, donors can get a tax deduction for contributions to IDAs, and they are also recognized for helping others in their community.

    IDAs are usually offered through programs that involve partnerships between local nonprofit organizations and financial institutions. The local nonprofit is also called the IDA program sponsor. The program sponsor recruits participants, provides financial education classes, and may also provide one?on?one counseling and training to participants. After signing up for an Individual Development Account program, each participant will open an account with a partnering bank or credit union.  The bank or credit union handles all transactions to and from the IDA, just as they do with other types of savings accounts. Each month, program participants receive a report telling them how much money (individual savings + match + interest) is accumulating in their account.

  • How Much Money is Matched in an IDA?
  • Some programs will only match up to a certain dollar amount (for example, $500) on an annual basis or during the course of the program. In most cases, you can deposit as much as you like in your account, but deposits over a certain dollar amount will not be matched. Some programs require account holders to deposit a minimum amount each month or every few months in order to stay in the Individual Development Account program. Before enrolling, make sure that you can save enough to make the minimum deposit.

  • When Can You Withdraw Money from your Individual Development Account?
  • The IDA savings period or program length will vary from program to program, but most savings periods range from one year to three years. The savings period indicates the length of time during which your savings will be matched. Program participants are allowed to withdraw money as soon as they have reached their savings goal, but they must first get approval from the program sponsor.

  • Am I Eligible for an IDA?
  • In most cases, people who open Individual Development Accounts are required to attend financial education classes to learn about creating and managing household budgets, using credit responsibly, the basics of saving and investing and saving for retirement. Account holders may also receive one-on-one counseling and other training.

    Most Individual Development Account programs specify a maximum household income level for applicants. Maximum income levels are most often a percentage of the federal poverty guidelines (usually 200%) or the area median income (usually between 65% and 85%).  Many programs also require that all or part of savings come from earned income. A paycheck is the most common source of earned income, but welfare, disability, social security, or unemployment checks are also earnings. Money given as a gift is not considered earnings.

    Some IDA programs also look at the household assets (such as a car, home, savings, etc.) in addition to household income when determining eligibility. If you own assets valued at more than $5,000, you may not qualify for these programs.

    Debt from credit cards and loans makes it difficult to save so you might not qualify for an Individual Development Account if you have a lot of debt or a bad credit history. A program sponsor may ask you to visit a credit counseling center or pay off your loans before you open an account.

  • Where Can You Find Information About IDAs?
  • There are more than 500 Individual Development Account programs in the United States, so the first step is to find a program close to where you live. The fastest way to do this is to go to the IDA Directory. Using the directory, contact the sponsor(s) closest to you to find out more about their programs and learn how to apply.

  • Great Mortgage IdeaRelated FREEandCLEAR Resources

  • Sources

    Individual Development Account Programs: https://prosperitynow.org/map

About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR. More about Harry

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