Individual Development Accounts
Individual Development Accounts, also known as IDAs, are special savings accounts. These accounts are for people who are saving money to buy a home. What makes them special is that certain nonprofit agencies will add money to these accounts to match what the homebuyer saves, under specific conditions.
There are different ways these matching funds can be handled by the nonprofit agencies. They might put the matching funds into a separate account, keep them in the same account but track them separately, or use a trustee account that holds both the matching funds and the homebuyer’s savings together.
When it’s time for the homebuyer to buy their home, the nonprofit agency will send the saved and matched funds to the closing agent. This could be done through one check or several checks. If the matching funds are in a separate account, they don’t have to be mixed with the homebuyer’s savings before being sent to the closing agent. The important thing is that the rules of the IDA program are followed.
The money saved by the borrower in an IDA can be used to help pay for the house’s down payment or the closing costs.
Use of IDA Funds to Meet Borrower Minimum Contribution Requirements
The money a borrower puts into an IDA can help with buying a house, specifically with the down payment or closing costs. However, whether the borrower needs to add more of their own money to meet the down payment depends on the rules of the IDA program.
If the nonprofit agency wants the matching funds back at some point, or if they say the borrower can keep the funds under certain conditions (like living in the house for a certain number of years), or if they secure the funds with a lien on the house, then the borrower can use these matching funds to help with the down payment. However, the borrower still needs to put some of their own money into the payment unless the loan-to-value (LTV) ratio is 80% or less, or the borrower is buying a single-family home and qualifies to use gifts or funds from other sources for the down payment.
If the nonprofit agency doesn’t ask for the matching funds back and doesn’t put a lien on the property, the borrower can use these funds for the down payment without needing to add more of their own money.
Lender Checklist for IDAs
Lenders have a list of things they need to check when a borrower wants to use an IDA for their home purchase. This list includes:
– Understanding how the IDA program works.
– Checking how much money the nonprofit agency will match.
– Making sure the borrower has followed the program’s rules for how long they need to save money.
– Keeping records of the borrower’s savings and the agency’s matching funds.
This checklist ensures that both the borrower and the lender follow the IDA program’s rules and that the funds are used correctly in the home buying process.
References
For more details, visit Individual Development Accounts of the Fannie Mae Selling Guide.