How to Use Your Tax Refund as a Down Payment on a Home

If you’re like millions of other taxpayers, you’ll receive a tax refund at tax time. A refund makes doing your taxes more fun, right?

But once you receive the refund, what do you do with it? A spending spree sounds fun, as does taking a dream vacation, but what if you could use it to invest in your future? What if your tax refund helped you buy a home?

According to the IRS, the average taxpayer receives $2,741 in a tax refund. While it won’t be the only money you need, it’s a good start.

Lower the Money Needed for the Down Payment

Any money you receive for a tax refund could help lower your down payment requirements. Today, FHA loans require a 3.5 percent down payment, and conventional loans just 3 percent for first-time homebuyers.

If you buy a $300,000 home, you need a $9,000 – $10,500 down payment. If you receive a $3,000 tax refund, you’re one-third of the way there. If you already had money saved, the tax refund could get you to where you need to be.

It’s also a great addition to gift money relatives or your employer provide to help you buy your first home.

Other Ways to Use Your Tax Refund to Buy a Home

If you already have the down payment funds, your tax refund may help in other ways to buy a home:

• Earnest money deposit – Sellers often want money ‘in earnest.’ This reassures them that you are serious about buying the home and won’t back out. If you do, the seller keeps your earnest money. Your tax refund could be the amount you need.

• Closing costs – Buyers pay 3 – 5 percent of the loan amount in closing costs. On a $300,000 loan, that’s $9,000 – $15,000. Your tax refund may help offset the costs, making it easier to buy a home sooner rather than later.

• Home inspection – Lenders don’t require a home inspection, but it’s a great way to determine a home’s condition. Wouldn’t you rather buy a home you know is in good condition versus one that’s a money pit? Use your tax refund for this peace of mind and you’ll thank yourself later.

• Reserves – If you have questionable credit or a high debt-to-income ratio, having liquid reserves on hand may get you the approval. Money on hand to cover your mortgage payment if you lose your job or can’t work reassures lenders when you otherwise seem like a big risk. It could be the difference between loan approval and denial.

Let your Tax Refund Help You Buy a Home

If you will receive a tax refund this year (or more stimulus checks) put the money to good use. Real estate is one of the largest and often most lucrative investments you can make. Whether you’re investing for the short-term, or you have your eyes on retirement, using your tax refund to buy a home can be one of the smartest financial moves you make.

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