During tax season, low to middle income families have more money than any other time of the year. Therefore, tax season is the best time to buy a house. So, let’s show you how to use your tax refund to buy a home. Not only can a tax refund be used as down payment, but it may also help a buyer actually qualify. With the right strategy, federal and state refunds can improve credit scores, asset reserves, or paying off debt. These funds help buyers create compensating factors to make homeownership more of a reality.
Best Time to Buy a House
Many articles debate the topic of when to buy or not to buy. Actually, the right time has many factors such as current interest rates, home prices, and local housing market activity. Obviously these areas are out of a buyer’s control, yet still play a large role in buying. Some markets are red hot during the peak seasons. In a ski area, the winter is busier. While most other areas peak during the Spring and Summer. Even though these are big influencers, the timing more than likely is decided by the individual buyer’s factors.
Usually, the best time to buy is determined more by the buyer’s situation rather than market trends. It is all about timing for a buyer. Key areas that sway a buyer’s decision include…
- Employment change or job relocation
- Credit score fluctuation
- Ability to sell current home
- Finding the house that meets buyer choices
- Saving up money for down payment or closing costs
Although, there are no down payment programs available like VA loans, USDA loans, or combining a first mortgage with down payment assistance, many need at least some funds to buy a home. Even if not bringing cash to closing, funds in the bank or retirement funds greatly improve approval chances! That’s why tax season is the best time to buy a house compared to the rest of the year! Plus, understanding what to do with a tax refund is key.
What To Do With a Tax Refund
When it comes to buying a house with a tax reimbursement from the government, it is key to understand what not to do and what to do with a tax refund.
Avoid These Tax Refund Mistakes
It is popular for many to receive a refund, cash the check or withdraw it, and maybe even spend it. Afterward, some decide to buy a home. Although there are still plenty of ways to buy a house with no down payment, it is easier if you know what to do with a tax refund. When buying a house, the following are best practices.
- Do not cash a refund check
- Depositing cash into bank account just before buying
- Do not spend on impulse items
- Discuss strategies with an experienced loan officer
- Plan your tax withholdings – IRS Withholding Estimator
Use Tax Refund as Down Payment on a Home
When it comes to housing, the most popular use is for down payment. Whether a buyer currently has no money or some down payment, a refund can provide a huge shot in the arm. Many first time home buyers may not realize that there are loans requiring no down payment. Plus, ones that do require a low down payment could be covered by a refund.
Just think, buying a $200,000 house with a 3% down payment Fannie Mae loan would be $6,000. Many taxpayers receive $6,000 or more from the state and IRS. Like mentioned before, tax season offers the best time of year to buy a house.
Low Down Payment Home Loans
Fortunately for buyers, there are plenty of home loans requiring very little cash to close. Also, they may all be used by first time home buyers. Although, most may be used by repeat buyers as well. Here are a few.
- USDA loans require no down payment
- VA loans are no down payment to any loan amount (with full entitlement)
- Down payment assistance may be combined with a conventional, FHA, USDA, or VA loan for low or no down payment
- FHA loans allow just a 3.5% down payment
- Fannie Mae and Freddie Mac allow as low as 3% down payment
Further down, we explain how to document a tax refund for a mortgage.
What to do With a Tax Refund – Improve Credit Scores
Sometimes buyers need to increase credit scores. No matter if it is to qualify or to just improve the score for a better rate, a tax refund can help. Usually, the quickest way to improve a credit score is paying down credit card or line of credit balances. Believe it or not, 30% of your credit score is based on balance compared to credit limit as a percentage. So cards with higher balances can dramatically hurt your scores.
| Card Balance | Credit Limit | % of Limit | Good / Bad for Scores |
| $100 | $1000 | 10% | Good |
| $270 | $300 | 90% | Bad |
| $7500 | $10,000 | 75% | Bad |
| $2,000 | $10,000 | 20% | Good |
Buyers who pay down a credit card that has a high balance compared to the limit can experience a significant increase in credit scores. Sometimes, it can be just a few hundred dollars.
Remember, speak to a very experienced loan officer before paying down accounts. As we are discussing, there are several key areas to use tax refunds. Sometimes it is best to pay down cards, while other times it is better to use it for something else.
What to do With a Tax Refund – Increase Chance of Mortgage Qualification
Mortgage qualification is made up of many areas. We have discussed down payment and credit scores. Two other main areas include debt to income ratio and asset reserves. Both can be helped by using a tax refund to buy a house.
Using a tax refund to pay off debts could make a big difference in qualifying for a home. Buyers could have small finance company loans, student loans, or even car loans with a lower balance remaining. By paying off loans, a buyer could free up hundreds of dollars per month. Finding this much savings could mean qualifying much better for a house payment. Furthermore, a buyer feels better about their budget with less monthly payments.
Probably the simplest use of a tax refund is just keeping it in the bank account. Mortgage loan approval chances improve by having money in the bank in excess of funds needed for closing. These funds are called asset reserves. So by having a few thousand left over in reserves after closing could turn from denial to loan approval. Keep in mind that funds in a retirement account, cash value in a life insurance policy, CD, or any bank accounts may be used as reserves as well.
Like mentioned above, it is best to leave the funds alone and speak to a home buying expert first. The solution may be as simple as keeping the funds in your account.
How to Document a Tax Refund
Let’s assume a buyer expects a tax refund. It is key to understand what home loan programs require of a buyer. First of all, you do not have to wait until you have the funds. Actually, it is best to apply as soon as you file your tax returns or even before. In order to document and use the refund, the following are required.
- Filed tax returns
- IRS or state check (if refund not direct deposited)
- Bank statement or printout showing direct deposit
So if you are expecting a tax refund or have one already, hopefully this has helped you better know what to do with a tax refund. Most importantly, tax season is the best time to buy a house because buyers have more funds than any other time. Want to know the best thing to do with your tax refund? Contact us today.
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