How to Use your Tax Refund to Help Buy a Home

For many, the thought of buying a home is daunting. From down payments to debt-to-income ratios, the financial hurdles can feel insurmountable.

But as tax season is upon us, it’s a good time to consider how your tax refund can help you buy your home.

According to the IRS, approximately 64% of tax returns filed and processed by April 21, 2023, resulted in tax refunds.

“The timing is great for many of our customers – they’re getting tax refunds right around the time they start looking for a home in the spring,” says Angela Stephens, IncredibleBank’s VP of Home Lending.

Here are a few ways you can use your tax refund to help buy your home.

Using your Tax Refund for your Down Payment

According to the IRS, the average tax refund for 2022 was $2,753.

Mortgage loans routinely last 15-30 years, so the more cash you can put down up front, the easier it is to lower your payments and shorten the amount of time you spend paying off your loan. Additionally, the larger your down payment, the less interest you potentially pay over the life of the loan.

Creating the largest down payment you can has additional benefits. Making the 20% down payment is encouraging to lenders and may trigger a lower loan rate than if you put less money down.

It’s also possible you’re in a position where you can’t put the traditional 20% down. There are programs that allow for as little as 3% down, and your tax refund can help you put enough money down to secure a loan.

If you can’t meet a 20% down payment, you may still get a loan, but you’ll have to pay Mortgage Protection Insurance to protect the lender in case you default. And while it may not be your favorite expense since you won’t see that money back in equity, it is useful in helping those without the means to put 20% down the ability to buy their own home.

“Ultimately, you should aim for the largest down payment you can, but even if you can’t make a full 20% down payment – which is hard for many borrowers – we can help find the best way to get you into your home,” says Stephens.

Using your Tax Refund to Pay Down Debt

Even if you do have enough money set aside for a down payment, you can also benefit from using your tax refund to pay down other debts.

An important part of the underwriting process when determining if you qualify for a loan is your debt-to-income ratio (also known as your DTI). Your DTI compares your current debts (such as credit cards, auto loans, etc.) to your current income (how much money you earn). If you carry a lot of debt, even if you have money set aside for a down payment, you may not qualify for a loan, or it may impact your loan terms.

“It’s not uncommon for our lenders to work with borrowers on paying off debts like credit cards,” says Stephens, “and using a tax refund is a great way to accomplish that.”

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