Can You Use Your Tax Refund to Buy a House?

    It’s that time of year when we’re all getting ready to submit our tax returns. It’s also the time of year when many of us are looking forward to receiving a refund from the IRS. If you’re looking to purchase a home, this might be the perfect opportunity to get your financing in order. Why? Because depending how much you receive after filing your tax return, you can put the money toward a down payment on the house of your dreams.

    How to Use Your Tax Refund to Buy a Home

    According to the IRS, the average tax refund amounts to $3050. However, that figure varies greatly. Yours might be much higher, depending on your personal tax situation. Regardless of whether you receive $3000 or $7500 in tax refunds, the important thing to know is that you can always put that money toward a down payment on a home.

    Exactly how much of the down payment you can cover will depend on the amount you want to borrow and the percentage you’re required to put down. Most regular mortgages require a down payment of 20 percent — however, there are also financing options with much lower down payment requirements. For example, an FHA mortgage can be 3.5 percent, 5 percent or 10 percent, depending on your credit score and history.

    Let’s say you receive a tax refund of $6500. If you’re looking to purchase a single-family home at a price of 100,000 with a regular 20 percent down payment, you need $20,000. If you already have $13,500 in savings, then with the added money from the tax refund, you’re ready to purchase a home — assuming you meet all other creditor requirements.

    If you have reasonably good credit and qualify for an FHA mortgage with a 10 percent down payment, you can probably put quite a large amount of your tax refund into the down payment. For example, if your tax refund is $5000, then you’re halfway there.

    Now, if you have good credit, you might qualify for an FHA mortgage with a down payment of 3.5 percent. If your refund is $3500, you can cover the entire costs of a down payment on a $100,000 home.

    Reasons to Use Your Tax Refund Towards a Home Purchase

    Of course, there are a million other things you can do with a tax refund — so why should you put it towards a home purchase? Here are a few reasons:

    • It makes financial sense. Ultimately, when you pay rent, your money goes to someone else. Yes, you can live in your current home for a month, but that’s all that rent money will ever do for you. After that month, your money is gone. In contrast, if you’re paying a mortgage, then the money you spend on mortgage payments are an investment in your own property. That property will likely increase in value over time, and the more valuable your asset, the more financial security you’ll enjoy.
    • Housing prices will continue to rise this year. In 2018, home prices will increase by 4.1 percent, according to Zillow. That means that the longer you wait to buy a home, the more likely you will be dealing with higher purchase prices.
    • The number of homes for sale is relatively low. The current inventory of homes for sale is lower than usual. As a result, there’s more competition for homes, which in turn drives up prices.
    • Buying a home gives you more tax deductions compared to renting. You can deduct mortgage interest from your taxes. In addition, you can deduct what you pay in property taxes.

    What to Do With Your Tax Refund if You Have a Zero-Down Loan

    If you qualify for a zero-down loan, such as a USDA or VA mortgage, then you won’t need a down payment. Nevertheless, you can still use your tax refund in a way that will help you purchase your home. Here’s how:

    • To pay off debt. When you’re applying for a mortgage, a lender will want to see you’re a low-risk investment — that means that you shouldn’t have a high debt-to-income ratio. If you do, you’re not going to be offered the highest mortgage or the best interest rates. So, anything you can do to pay off debt is good. However, keep in mind that you do still need credit, so don’t close any lines of credit before speaking to a financial advisor.
    • To build up financial reserves. The more savings and assets you have, the better, because that lowers a mortgage lender’s risk. Simply putting your tax refund in the bank to increase your savings can help you qualify for better interest rates.
    • To cover closing costs. If you have all your finances in order and you’re ready to purchase a home, you still need to budget for closing costs. These are typically between two and five percent of the purchase price. So, if you’re buying a $100,000 home and the closing costs amount to three percent, then a tax refund of $3,000 covers those costs.
    • To put toward home improvement. Most people who purchase a home plan to do some work on it, even if it’s a something as small as a different color paint in the living room. At the same time, you might need to do a considerable amount of work on your new home — for example, by putting in a new bathroom, insulating the attic or replacing the water heater. Having the money from your tax refund in the bank can be a huge help.

    Contact Us for More Information

    To learn more about using your tax refund to buy a house, contact the team of experts at CENTURY 21 Core Partners. We can inform you about how to best fit your refund into your overall financing plan. This way, you know your lender will approve you for a mortgage when you’re ready to make an offer on the home of your dreams.

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