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Should You Use Your Tax Refund Towards a New Home?

During Tax Season, Refunds Help So Many become homeowners!

Down payment is one of the biggest obstacles for prospective first time buyers to purchase a home.  But during tax season, many tax payers have more funds than any other time of year.  So there is no better time to qualify for a new home!  Quite often a tax refund may actually cover the whole down payment on a home purchase.  Additionally there are several programs that do not even require a down payment.  Even though down payment may not be required, assets help the strength of the borrower.  Furthermore, tax refunds may be used as assets or down payment right away.

If I Use a No Money Down Home Loan to Buy, Can I Spend My Tax Refund?

The quick answer is NO!  At least that would be the answer for right now.  Even if a buyer is using a 100% financing mortgage product like USDA or VA.  There are several reasons NOT to spend that tax refund.  Here are several reasons.

  1. Use the tax refund to pay closing costs
  2. Pay off debts to help qualify (talk to us before paying off a debt or collection!)
  3. Keep the refund in the bank as reserves.  More reserves equals better chance of approval
  4. Pay down credit card balances to raise credit scores
  5. Have money for furniture, curtains, or an emergency fund as a homeowner

Can I Apply Now for a Mortgage Even Though I Do Not Have my Refund Yet?

It is perfectly fine to apply for a mortgage loan when you don’t have your refund yet.  At application we can just assume the amount that you will be receiving.  As long as we can prove receipt of the funds in your account prior to the final underwriting approval.

Warning!  Don’t Do This With Your Tax Refund!

Too often we see borrowers receive a tax refund and then just cash the check.  Others will immediately withdraw the funds
from their account. Converting the refund into cash causes problems on a purchase.  Also if the cash is deposited later, proving the source is very difficult.  So it is best to deposit the refund and keep it there.  At least keep the funds in the bank account while waiting for correct advice from a mortgage professional.

Most importantly, talk with one of our professionals before spending or withdrawing the tax refund.  Each borrower’s scenario is different.  Sometimes it is more important to pay off a debt to qualify.  Conversely, others may benefit by having a down payment.

No down payment loans such as USDA or VA are great options.  Believe it or not, these loan payments may even be lower per month than loans which require a down payment.  So we will review these potential options as well for you.

In summary, let’s make sure you know all of your options before spending your tax refund.  You many not even have to spend it at all!

Mortgage Products Available for First Time Buyers Offering Low to No Down Payment

  1. USDA – No down payment required
  2. VA – Usually no down payment required.  Depends on entitlement amount, purchase price, and county limit
  3. FHA – 3.5% down payment
  4. Down Payment Assistance.  Use to offset down payment or closing costs
  5. Conventional – 3% or more down payment
  6. AND first time buyers can even get up to an additional $2000 tax credit each year!

With a tax refund, is there a better time to buy?  This is a great opportunity – low rates, stable job market, and affordable homes.  Why not buy a home now?

6 Signs First time home buyer

7 Steps to Take Before You Buy a Home

6 Signs First time home buyer

By doing your homework before you buy, you’ll feel more content about your new home.

Most potential home buyers are a smidge daunted by the fact that they’re about to agree to a hefty mortgage that they’ll be paying for the next few decades. The best way to relieve that anxiety is to be confident you’re purchasing the best home at a price you can afford with the most favorable financing.

These seven steps will help you make smart decisions about your biggest purchase.

1. Decide How Much Home You Can Afford

Generally, you can afford a home priced two to three times your gross income. Remember to consider costs every homeowner must cover: property taxes, insurance, maintenance, utilities,  and community association fees, if applicable, as well as costs specific to your family, such as day care if you plan to have children.

2. Develop Your Home Wish List

Be honest about which features you must have and which you’d like to have. Handicap accessibility for an aging parent or special needs child is a must. Granite countertops and stainless steel appliances are in the bonus category. Come up with your top five must-haves and top five wants to help you focus your search and make a logical, rather than emotional, choice when home shopping.

3. Select Where You Want to Live

Make a list of your top five community priorities, such as commute time, schools, and recreational facilities. Ask a REALTOR® to help you identify three to four target neighborhoods based on your priorities.

4. Start Saving

Have you saved enough money to qualify for a mortgage and cover your down payment? Ideally, you should have 20% of the purchase price set aside for a down payment, but some lenders allow as little as 5% down. A small down payment preserves your savings for emergencies.

However, the lower your down payment, the higher the loan amount you’ll need to qualify for, and if you still qualify, the higher your monthly payment. Your down payment size can also influence your interest rate and the type of loan you can get.

Finally, if your down payment is less than 20%, you’ll be required to purchase private mortgage insurance. Depending on the size of your loan, PMI can add hundreds to your monthly payment. Check with your state and local government for mortgage and down payment assistance programs for first-time buyers.

5. Ask About All the Costs Before You Sign

A down payment is just one home buying cost. A REALTOR® can tell you what other costs buyers commonly pay in your area — including home inspections, attorneys’ fees, and transfer fees of 2% to 7% of the home price. Tally up the extras you’ll also want to buy after you move-in, such as window coverings and patio furniture for your new yard.

6. Get Your Credit in Order

A credit report details your borrowing history, including any late payments and bad debts, and typically includes a credit score. Lenders lean heavily on your credit report and credit score in determining whether, how much, and at what interest rate to lend for a home. The minimum credit score you can have to qualify for a loan depends on many factors, including the size of your down payment. Talk to a REALTOR® or lender about your particular circumstance.

You’re entitled to free copies of your credit reports annually from the major credit bureaus: Equifax, Experian, and TransUnion. Order and then pore over them to ensure the information is accurate, and try to correct any errors before you buy. If your credit score isn’t up to snuff, the easiest ways to improve it are to pay every bill on time and pay down high credit card debt.

7. Get Pre-Qualified

Meet with a lender to get a prequalification letter that says how much house you’re qualified to buy. Start gathering the paperwork your lender says it needs. Most want to see W-2 forms verifying your employment and income, copies of pay stubs, and two to four months of banking statements.

If you’re self-employed, you’ll need your current profit and loss statement, a current balance sheet, and personal and business income tax returns for the previous two years.

Consider your financing options. The longer the loan, the smaller your monthly payment. Fixed-rate mortgages offer payment certainty; an adjustable-rate mortgage (ARM) offers a lower monthly payment. However, an adjustable-rate mortgage may adjust dramatically. Be sure to calculate your affordability at both the lowest and highest possible ARM rate.