Many people will be receiving good-sized tax refunds when they file their income taxes for 2013. Saving enough money to cover the down payment on a home is often the primary stumbling block when people want to become homeowners. With mortgage rates at or near record lows, it may make financial sense for first-time borrowers to use their tax refunds as a down payment to purchase a home that often carries lower monthly mortgage payments than what they pay in rent. It also may make sense for people who are currently homeowners to use their tax refunds to enable them to upgrade to other homes.
The Down Payment
A sizeable refund might be enough to get you into a Federal Housing Administration (FHA) loan, which requires a down payment of as little as 3.5%. If you already have some money saved, that money, when combined with your tax refund, could even be enough to get you over the 20% down payment threshold so that you can avoid paying for Private Mortgage Insurance (PMI). If so, that could be a great use of your money, because in addition to building equity in your new home, you’ll realize additional savings by avoiding PMI.
According to the Internal Revenue Service, the average tax refund for the 2012 tax year (2013 filing season) was about $2,650. Borrowers who are able to qualify for an FHA loan would have to come up with about $6,300 for a 3.5% down payment for a home with a price of $180,000. The tax refund can certainly help, even if it doesn't cover the entire down payment.
If you already have enough money for the down payment on a home, you can use the refund in order to help you meet the cash reserve requirements of your lender, or to beef up your maintenance fund for home repairs.
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 the proper source. Generally, a proper source is a bank account, savings account, retirement fund, etc.
"Seasoned" means that you have to show that you had the money in your account(s) for 60 days, which is why the lender asks for two months of bank statements when pre-qualifying a borrower for a home mortgage.
There are a few sources however, which are considered acceptable sources and fully seasoned even if the funds were received very recently, e.g., even in the past few days.
Three such sources are:
1. 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, i.e., 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.
2. Insurance Award – If you are the recipient of an insurance award, this check is considered sourced and seasoned. Again, be sure to make a copy of the check and the deposit receipt showing the deposit into your bank account.
3. Funds from the sale of personal property that you own. You will need to produce a receipt for the sale of the item and a deposit receipt showing the deposit into your bank account.
Notes:
1. If you supply a bank statement for deposit verification purposes, be sure that you are prepared to document any deposits that are out of the ordinary. For example, payroll direct deposits are normal, whereas an underwriter would likely require an explanation for a $500 cash deposit.
2. A cash advance or short term loan to cover an EXPECTED tax refund IS NOT an acceptable source of funds for a down payment or to close.
The cash required in order to close is often the very last step in closing escrow on your new home. You don't want to be running into any problems regarding funding at the last minute. As always, it is recommended that you keep your loan officer fully informed regarding any financial matters throughout the mortgage lending process.
Another piece of advice - if you are considering using a tax refund to buy a home in the near future, it's a good idea to get with your loan officer to get pre-qualified and to start shopping early, before millions of people get their tax refund in April and begin competing with you for the same home.
