Key takeaways

  • Tax refunds could be a substantial influx of cash – use it wisely
  • A tax refund could cover your whole down payment
  • Funds to close are often overlooked until you have to pay for them
  • Deposit the refund and keep it there to build your financial strength

With good planning, a tax refund could cover the whole down payment for a home purchase!

If you’re looking to buy a home at the start of the year, there’s good reason to hang on to your tax refund. This is the time of year when potential homebuyers have the most funds at their disposal, and that extra money comes in handy when making a down payment on a home, financing funds to close, or building financial strength. So don’t go on a spending spree just yet!

What if I don’t need a down payment?

Not all mortgage loans require a down payment. Saving for a down payment isn’t necessary for 100% financed mortgage products, like USDA and VA loans. However, there are perfectly good reasons to keep your hands on that tax refund.

Funds to close

– include three parts: down payment, hard costs and soft costs. Even if you don’t have to pay anything down, you will still need money for appraisals, titles, public records searches, underwriting/loan processing, survey and any required permits/materials if you’re renovating. These are your hard costs; the tangible stuff.

Soft costs also factor into the over cost of your transaction/loan. They can include setting up an escrow account for your property taxes and home insurance, and paying for prepaid interest until your first house payment is due. In addition, homeowners insurance must be paid one year in advance.

Debt-to-income ratio

– also plays a role in qualifying you for a loan. Not all debt is bad, of course, but some can hinder your ability to get a loan, or get the best possible interest rate. Using your tax refund to help pay down these debts – like credit cards, debts in collection, auto loans, etc. – can do a lot to improve your credit score. Be sure to talk things over with a mortgage lender to isolate the priority debt.

Cash reserves

– also improve your chance of approval. Lenders view money in your bank account as as asset. That’s especially important, because first-time homebuyers typically don’t have many assets to speak of. So deposit the return, bury it, and forget about it. It will serve you better as an asset than in your pocket.

And if you can get through the whole closing process without touching your tax refund, good for you! Now you have a pile of money you can spend on furniture, appliances, or even start building up an emergency fund.

What if I didn’t get my tax refund yet? Should I hold off applying for a mortgage?

There’s no reason to. As long as the funds are in your account (and we can prove it) prior to the final underwriting approval, you’re all set. Lenders assume your refund amount at the time of application.

Final Thought

Too many people get their tax refund check and cash it, or immediately withdraw funds from their bank account. These can have unintended consequences on your ability to qualify for the mortgage loan that you want. It’s important for the lender to get a sense of financial stability, and one good way for that to happen is to deposit the check and leave it there.

Again, think of it as an asset, and be sure to review any plans for the money with your lending agent. Our office is always ready to answer your questions, and we’ll work with you to determine the best course of action for your return.