April Gould, February 8, 2024
For most Americans, saving up a substantial down payment is quite a challenge. However, buying a home may be easier than you think. If you are getting an income tax refund this year, you may have enough funds to buy a home. According to the filing statistics released by the IRS each year, in 2023 (2022 tax year) 64% of taxpayers received a refund. And depending on what state you pay taxes in, the data showed the average refund ranged from $2,800 to $4,800. It is no surprise then, that the end of tax season is typically one of the busiest home-buying times of the year. Not only is more favorable weather just around the corner, but also having an influx of cash makes this a great time to consider making a move. In this blog we will share 5 smart ways you can use your income tax refund toward homeownership.
If you are ready to enjoy all the benefits that owning a home brings, this may be the year to start your homeownership journey!
Boost Your Down Payment:
One of the most straightforward ways to use your tax refund is to boost your down payment. A larger down payment can lead to lower monthly mortgage payments and may even help you secure a more favorable interest rate.
Department of Veteran Affairs (VA) loans and USDA Rural Development (RD) loans do not require a down payment, but Conventional mortgages require at least 3% down. If you are struggling to come up with the minimum down payment, this is a great use of your tax refund. Or, if you already have a down payment saved, adding your tax refund to it may be enough to avoid paying Private Mortgage Insurance (PMI) and save you quite a bit of money over the long term.
Additionally, most loan programs require that the money you use for a down payment is “sourced and seasoned.” This means that as the borrower, you will need to show where the down payment came from (the source) and that this money has been in your bank account for at least 60 days (seasoned). But there are exceptions to this rule and tax refunds are one of those exceptions. Your tax refund does not need to be sourced or seasoned; a copy of the Treasury check and a bank receipt showing the deposit will suffice.
Improve your DTI:
When you apply for a mortgage, one of the factors lenders look at in deciding whether or not to lend is your debt-to-income ratio (DTI). This is expressed as a percentage and is calculated by adding up all your monthly debt payments and dividing them by your gross monthly income. If your DTI is too high (meaning your debt is too high for your income) this may hinder your ability to qualify for a mortgage.
Using your refund to pay off credit cards, student loans or other consumer debt can improve your debt-to-income ratio. Additionally, you may see an increase in your credit score.
Provide the Earnest Money Deposit:
When you put an offer on a house, it is customary to put down what is known as an earnest money deposit (sometimes referred to as a good faith payment). The deposit is placed in an escrow account and gets applied to the funds you, as the buyer must bring to closing.
The reason behind an earnest money deposit is to discourage buyers from casually putting an offer on a property without serious intent to follow through. If the seller accepts an offer and takes the property off the market in good faith, they want protection that the buyer is serious. The amount of the deposit can vary from a flat $1,000 to a small percent of the purchase price.
Cover Closing Costs:
First-time homebuyers may think the only up-front cost is the down payment. While some loans do not have a down payment requirement, all loans will have closing costs. Closing costs cover services and fees like homeowners’ insurance, title search, and appraisals. Although closing costs are split by the buyer and seller, your tax refund can be a significant asset in covering these expenses.
Get a Better Interest Rate:
The interest rate you qualify for is determined by your creditworthiness, DTI, down payment amount, the value of the property you are buying, the type of mortgage you obtain, and the length of the loan term.
Typically, borrowers with a higher credit score will secure a lower interest rate. Knowing what is on your credit report before you apply for a mortgage gives you an opportunity to address any potential issues. By law, you have the right to a free credit report once a year from each of the three major credit reporting agencies. (You can get a copy of your credit report at www.annualcreditreport.com).Using your tax refund to pay off outstanding debts can make a substantial impact on your credit score, therefore increasing your chances of getting approved and getting a good rate.
Another option for getting a better interest rate is by purchasing points. Points are a way to “pay down” your interest rate for the life of the loan. Each point will cost 1% of the loan amount and will lower your interest rate by 0.25%. Purchasing points may mean you pay more up front, but by reducing the interest rate, you pay significantly less over time.
Your income tax refund is a valuable financial resource and how you choose to spend it is obviously entirely up to you. But, if you are ready to enjoy all the benefits that owning a home brings, this may be the year to start your homeownership journey! One call to a MiMutual Mortgage Loan Officer is all it takes to get started!
