Can I Use My Tax Refund For a Down Payment?

Springtime is traditionally thought of as “home-buying season.” It just so happens that it’s also time to file your taxes and hopefully get a refund. According to statistics from tax year 2022, roughly two-thirds of taxpayers received refunds, with an average amount of $3,200. For anyone saving up to buy a house, this is welcome news. You can definitely use that tax refund for a down payment. There are also some other ways to use the money you get back that can help make buying your next home a bit easier.

Saving for a down payment can be one of the most challenging parts of buying a house, especially for first-time homebuyers. The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, offers some mortgages requiring as little as 3% down, but there are benefits to having a much larger percentage of the home’s price on hand.

For years, a 20% down payment has been the suggested goal, but that isn’t realistic for everyone. The average amount varies nationwide. In Missouri, for example, the average down payment is 12.2%. In Illinois, it’s 14%. 

In order to get a mortgage loan, most lenders will insist on some money down, and the higher the amount, the better. A bigger down payment can have the following effects:

• A more favorable interest rate
• More affordable monthly payments
• Avoiding paying for PMI (if the down payment is less than 20%, Private Mortgage Insurance protects the lender in case you default)
• Greater appeal for the seller compared to others making offers

To a certain extent, you can control the amount of your tax refund by deciding how much income tax to withhold from each paycheck. The more the IRS withholds now, the more they’ll pay back when you file your tax return. The IRS has an estimator tool to help you determine what to claim on your employer’s W-4 form and how it will affect your take-home pay and tax due or refund.

Many people count on receiving a tax refund every year, but it’s not recommended that you over-withhold just to get a windfall in the spring. Most investment professionals agree that there are more effective ways to build your nest egg. Consider seeing a financial advisor or accountant for advice that fits your situation.

If you do receive a large sum, here are some ways to use your tax refund to buy a house: 

Down Payment

If you get a $3,000 tax refund, you’re already one-third of the way toward the down payment amount needed to obtain some Freddie Mac mortgage loans for a $300,000 house. If you’re aiming for a bigger percentage, this is a substantial amount toward your goal.

Earnest Money

When your offer on a house is accepted, you’ll be asked for earnest money to prove your commitment to going through with the deal. The money is held in an escrow account and then applied to your down payment when you close. Earnest money is typically about 1% to 3% of the purchase price. You can use your tax return to cover some, or possibly all, of this amount.

Closing Costs

Realtor commissions, title fees, prorated property taxes, and administrative fees are just some of the expenses that must be paid at closing by the seller, buyer, or both parties. Saving your tax refund for closing costs will make writing the check easy whether selling or buying.

Pay Off Debt

In the early stages of saving for a down payment, you may have a hard time qualifying for a mortgage, especially if you have bad credit. Lenders look at a borrower’s debt-to-income (DTI) ratio along with the amount of their down payment to determine the amount of risk. Too much debt compared to your paycheck and you’re likely to have a high interest rate—if your mortgage is approved at all. Using a tax refund to pay down debt can give your credit score a boost and improve your DTI.

Moving and Moving In

If you’ve been savvy enough to have your down payment and closing costs covered, there are still a lot of expenses with a new home. A bit of extra cash in the form of a tax refund will come in handy for hiring movers, buying furniture, appliances, or window treatments, setting up utilities and internet services, or even boarding the dog or getting a babysitter for moving day.

If you’re nearing your goal for a good down payment on your dream home, perhaps this year’s tax refund will get you to the finish line. Berkshire Hathaway HomeServices Select Properties is ready when you are. 

Our agents can help you figure out your budget, determine a realistic down payment, and find the perfect home in your desired location. We even have an in-house lender, Nations Lending, to assist with your mortgage needs contact us today!

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