Consider using your income tax refund towards your move to homeownership! Tax refunds make a great source of funds for the downpayment or closing costs. Buying a home is easier than you might think.

For some potential homebuyers it can be a struggle to come up with the down payment they need to qualify for a mortgage loan. While there are many sources of down payment funds to consider, one great option is your income tax refund. If you are getting money back from Uncle Sam, instead of buying a car or taking a trip, consider using the money as a down payment for your new home. Doing so may allow you to buy a bigger house or obtain a more advantageous interest rate.

A Tax Refund meets the requirements for mortgage down payment funds

Most mortgage programs require that the money you use for your down payment be “Sourced and Seasoned”.

“Sourced” means you have to show where the money came from.  Your down payment and closing costs must come from a documented source.  Generally, an eligible source is a bank account, savings account, retirement fund, a gift from a qualified donor, etc.

“Seasoned” means that you have to show that you had the money in your account(s) for 60 days, which is why we ask for two months of bank statements when pre-qualifying a borrower for a home loan.

There are a few sources however, which are considered acceptable sources and fully seasoned even if the funds were received very recently, even in the past few days.

The best can be your Tax Refund – A copy of the Treasury check and a bank receipt showing the deposit are acceptable to prove sourced and seasoned funds.  If the refund was automatically deposited into the account, if there is no check, a notation on the bank statement will suffice to show that it is a tax refund.  In the case of automatic deposits, the only documentation necessary is the bank statement.

The upfront costs of homebuying can be significant, but your income tax refund from the IRS and the state can be a useful supplement to your homebuying budget.

Whether you are expecting a refund in the hundreds or thousands of dollars, there are several ways you can use those funds to bring yourself closer to homeownership.

Save for a Down Payment

Saving for a down payment can be one of the largest barriers to homeownership, and the typical homebuyer makes a down payment between 3.5% and 20% of the purchase price. Using your tax return to help with a down payment may help you reach your goal more quickly than expected.

Pay for Closing Costs

Before you officially take ownership of your home, there are costs involved for the loan, to your real estate agent and other third parties involved in the homebuying transaction. These are known as closing costs. This is another area where you could direct your tax return.

Typically, homebuyers will pay between 2% and 5% of the purchase price of their home in closing costs, or between $4,000 and $10,000 on a $200,000 home.

Lower Your Interest Rate with Discount Points

During the homebuying process, your loan officer may present you the option to pay discount points to buy down your mortgage interest rate. A “point” equals 1% of the loan. Discount points are essentially an upfront interest payment to lock in a lower interest rate on your fixed-rate mortgage, ultimately saving you money over the life of your loan.

Using your tax refund to pay discount points can help lower the amount of your monthly mortgage payments.

For more information about becoming a homeowner, visit Mortgages & Personal Loans on the First National Bank of Michigan website.

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