Using Your Tax Refund As A Down Payment For A New Home

February 1, 2017

The Problem:

A common struggle amongst renters trying to buy their first home is saving enough for a down payment.  You are already trying to make ends meet, possibly living paycheck to paycheck, how are you supposed to stash thousands of dollars to buy a home? (Yes, you will need thousands.)Unless you qualify for loan program that requires little to no money down, you are expected to bring at the minimum 3.5% of the loan amount as a down payment. Well, you may have an opportunity to save a huge portion of your down payment right now using your 2016 tax refund.

 

 

Using Your Tax Refund

The average tax refund in 2015 was $3,116. Three thousand dollars. That is a lot of money. It could be a very tempting online shopping cart, or the investment into your future. The choice is yours. But let’s get an idea the impact this kind of money would have.

 

Based on the average home price in Houston of $198,000 you could determine your minimum down payments as follows:

 

  • FHA Loan with 3.5% down – you would need about $6,900.

  • Conventional Loan with 5% down – you would need about $9,900.

 

If you have been saving your down payment, your 2016 tax refund may cover all or most of the remaining amount that you need. If your tax refund doesn’t cover the down payment completely, it can still be that push you needed to get started.

 

Are You Dealing with Debt?

If you are dealing with payments to recurring debt (credit cards, student loans or car payments), look into payment strategies like the Debt Snowball Method by Dave Ramsey to make sure you are making the most of your payments and not losing everything to interest charges. You may need to take your refund to pay off any recurring debt that is inhibiting you from saving additional money each month. This in turn will also help out your credit score. Side Note – Did you know you can check and monitor your credit score for free now? With the CreditKarma.com app, you can view your TransUnion and Equifax scores and with the CreditSesame.com you can view your Experian score – all for free and from your phone.

 

How to Save

A lot of savings tips will have the same theme, but figure out what is comfortable to you and stick to it. There’s usually room some where to trim down expenses. Depending on your situation, you have the potential to save a good amount of money by owning a home. What many renters don’t realize is you are already paying a mortgage – your landlord’s. Plus any additional costs rolled in to cover expenses and repairs. If you plan to settle down, cut out the middle man and invest in your future.

 
Resources for saving money for a down payment:

 

54 Ways to Save Money
100 Ways to Save Money
8 Simple Ways to Save Money
15 Ultra-Frugal Money Saving Tips

 

Leave a comment below with your favorite money-saving tips!

 

Why Are Down Payments Required?

Lenders require down payments to secure a loan when you cannot pay cash in full. A down payment protects the lender. If you stopped making payments and ended up in foreclosure, you forfeit any down payment amount.  This gives you incentive to make your payments on time and to truly determine whether you can afford a home or not.

 

 

 

Minimum Payment

Depending on your credit history, your reason for buying and the type of home, the minimum down payment could range from 5% to 20% or more. Currently, the minimum required down payment for an FHA loan is 3.5% and for Conventional it is 5%.

 

 

 

What’s Next?

First, you probably need to file your taxes and determine your refund status. From there, figure out how much you can afford as a down payment by adding your current savings and your tax return. Let’s say you have $1,200 saved and will receive a refund of $2,700. That’s $3,900. Divide that by .035 to figure out the approximate loan value (3.5% down payment), in this case roughly $111,400. From there, you could continue saving to increase the potential loan value or decrease the amount of closing costs by bringing a larger down payment than the minimum.

 

Everyone has a different situation so please take a moment to truly understand your finances and goals. When you are ready, give us a call and we can figure it out your next steps together.

 
Sources:

https://www.irs.gov/uac/newsroom/tax-refunds-reach-almost-125-billion-mark-irs-gov-available-for-tax-help
http://www.realtor.com/local/Houston_TX
http://www.bankrate.com/finance/mortgages/down-payment-1.aspx
http://www.bankrate.com/finance/mortgages/4-mortgages-that-require-little-money-down-1.aspx

 

 

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CONSUMERS WISHING TO FILE A COMPLAINT AGAINST A MORTGAGE BANKER OR A LICENSED MORTGAGE BANKER RESIDENTIAL MORTGAGE LOAN ORIGINATOR SHOULD COMPLETE AND SEND A COMPLAINT FORM TO THE TEXAS DEPARTMENT OF SAVINGS AND MORTGAGE LENDING, 2601 NORTH LAMAR, SUITE 201, AUSTIN, TEXAS 78705. COMPLAINT FORMS AND INSTRUCTIONS MAY BE OBTAINED FROM THE DEPARTMENT’S WEBSITE AT WWW.SML.TEXAS.GOV. A TOLL-FREE CONSUMER HOTLINE IS AVAILABLE AT 1-877-276-5550. THE DEPARTMENT MAINTAINS A RECOVERY FUND TO MAKE PAYMENTS OF CERTAIN ACTUAL OUT OF POCKET DAMAGES SUSTAINED BY BORROWERS CAUSED BY ACTS OF LICENSED MORTGAGE BANKER RESIDENTIAL MORTGAGE LOAN ORIGINATORS. A WRITTEN APPLICATION FOR REIMBURSEMENT FROM THE RECOVERY FUND MUST BE FILED WITH AND INVESTIGATED BY THE DEPARTMENT PRIOR TO THE PAYMENT OF A CLAIM. FOR MORE INFORMATION ABOUT THE RECOVERY FUND, PLEASE CONSULT THE DEPARTMENT’S WEBSITE ATWWW.SML.TEXAS.GOV. COMPLAINTS REGARDING THE SERVICING OF YOUR LOAN SHOULD BE SENT TO THE TEXAS DEPARTMENT OF SAVINGS AND MORTGAGE LENDING, 2601 NORTH LAMAR, SUITE 201, AUSTIN, TEXAS 78705. A COMPLAINT FORM AND INSTRUCTIONS MAY BE DOWNLOADED AND PRINTED FROM THE DEPARTMENT’S WEBSITE LOCATED AT WWW.SML.TEXAS.GOV OR OBTAINED FROM THE DEPARTMENT UPON REQUEST BY MAIL AT THE ADDRESS ABOVE, BY TELEPHONE AT ITS TOLL-FREE CONSUMER HOTLINE LISTED ABOVE, OR BY EMAIL AT SMLINFO@SML.TEXAS.GOV.