While peak buying season typically takes place during spring and summer months, tax refund season is the time of year when most first-time home buyers qualify. In most cases, tax refunds leave prospective buyers with additional funds for down payment and cash reserves. Mortgage loan underwriting systems and underwriters love to see assets. Therefore, more loans get approved.
There are a few tidbits of information buyers should know to best utilize their tax refund and the loan products available to them when financing a home.
Tax Refund for Down Payment
One hurdle most prospective buyers face is funding a down payment. This is especially true for first-time homebuyers, but there are low down payment mortgage programs available (examples include FHA, VA, USDA, Conventional, VHDA, and down payment assistance products). Down payment amounts on these products could be 3.5% of the purchase price to even nothing down.
If you have a tax refund coming, it could be used immediately for down payment. It is also possible to get pre-approved for a purchase loan before receiving the refund. In this case, the tax return could be used to show the upcoming refund. Once the tax refund is deposited and verified, it can be used for closing.
Tax Refunds Will Help With No Down Payment Loans
As mentioned, there are no down payment loan options. Tax refunds can help tremendously on these as well. The funds could be used to pay closing costs, cover the first year of insurance, and could help with setting up escrows. Although, don’t forget that seller paid closing costs could be included in the purchase price. In that case, the buyer can finance part or all of the closing costs rather than bring to closing.
A Little Known Tax Refund Benefit
Sometimes a buyer may use a no down payment mortgage like VA or USDA but will have a hard time qualifying. There may be too many debt payments for the income level which is called a high debt ratio. This is a scenario where the tax refund could be used to pay off debts to qualify. Paying down credit cards or lines of credit can raise a credit score dramatically too. Credit scores, which don’t need to be perfect to buy, are important criteria for mortgage qualification. Before paying off debts, be sure to consult with a qualified mortgage loan officer. If the wrong debt is paid off, it could jeopardize an approval.
As mentioned above, automated underwriting systems like to see assets. A file that has a lower credit score, high debt ratio, or other hurdles could receive an approval with asset reserves. If a borrower has asset reserves still in place after all funds are needed for closing, it may help them get approved for a mortgage. It is especially helpful when the amount of reserves equals 2 – 6 months of monthly mortgage payments.
It would be ideal if the tax refund doesn’t have to be spent at a purchase closing. In that case, this money could be put into emergency savings or used to purchase furnishings for the house.
Either way, assets are important, and this time of year helps many get into a home. Talk to an OVM loan officer before receiving and especially spending your tax refund.
2018 Tax Season Dates – Federal Individual Returns
First filing date: January 29, 2018
Earliest refund date: February 27, 2018
Tax returns due: April 17, 2018
Tax extension deadline: October 15, 2018
What Not To Do With Your Tax Refund
Even the IRS advises that taxpayers should file and receive their refund electronically. One it is quicker, and secondly, it should be more secure than receiving a physical check, but there is one huge issue that happens with tax refunds which should be avoided at all costs when buying a home. Too often, we see borrowers will withdraw the tax refund(s) from the bank account, so it is in the form of cash. Then, when the funds are needed for buying a home, the borrower puts the remaining funds back into the bank account. When this is done within 1 – 2 months of closing it can cause an issue with closing. The funds may not be able to be used. Another common issue is spending the refund before buying. It is best to keep the funds in the bank account while waiting for advice from your mortgage professional.