A large part of your mortgage approval is the down payment. It determines how much home you can afford as well as the amount of your monthly payment on your mortgage. The less you put down, the less home you can afford or the higher your monthly payment. One way to increase how much you put down is with your tax refund. This money, which you likely receive once a year, can help increase your ability to put the necessary down payment on a home.
How to Handle your Tax Refund
If you plan to use your tax refund for a down payment, you have to follow very strict procedures. If you miss a step, a lender might not be able to use the funds. They have to have a paper trail. In order to have a trail, you have to deposit the refund in the account you plan to use for your down payment. If this is your checking account, then deposit the entire check in this account. You should not deposit a part of the check and take cash the rest. You should also not deposit it and then withdraw it as cash. Deposit it and leave it alone.
The next step is for the lender to officially verify your deposit. This means with your deposit receipt and your bank statement. If you were to take the refund out in the form of cash and deposit it into another account, the lender cannot verify its source. They can source a check – they cannot source cash. In some cases, the lender may also need to verify your refund with your tax return. This is even more proof of the legitimacy of the money you claim as your refund.
How Can a Refund Help You?
There are many ways you can use your tax refund for a down payment. In some cases, it can increase the amount of money you are eligible to borrow. This makes it possible for some people to purchase more home than they would have been able to do before. A refund can also help you become eligible for a mortgage at all. If you did not have enough for a down payment, you might not qualify. For example, the FHA loan requires you to put down 3.5% of the price of the home. Let’s say you found a $100,000 home. This means you need to put $3,500 down. If you only have $2,000, you would not qualify. If your tax refund was large enough to supplement the money you have already, though, it could help you qualify for the loan.
Should Your Refund Increase Your Purchase Power?
It is a tough decision to decide whether your tax refund should increase your purchase power. In general, you should not increase the purchase price of a home because you came into some money. Remember, you still have to make the monthly payments for the next 15 to 30 years. If you purchase a home with a payment you cannot afford, it might put you in a bind. Instead, you can use your refund to help you pay your down payment and put the rest as your reserves. You can use the reserves to supplement your monthly payments during tough times or even for regular maintenance on the home. Once you purchase a home, it will have plenty of costs down the road. You might be glad you have the extra money on the side!
What if Your Refund is not Traceable?
Hands down, no lender will approve your down payment funds if your refund is not traceable. This is why you cannot convert it into cash. Even though you could argue that the cash came from the check, which you can prove, so much could happen from there. The lender cannot take your word for it that the cash is the money from the check. They have to have a paper trail. This is why directly depositing the refund and leaving it in your account until your lender tells you to go ahead and take it out for the down payment is important.
Money needs to be traceable in order to ensure its validity. If you walk in with thousands of dollars in cash, there is no saying where it came from. What if someone lent it to you? This changes your debt ratio. Now the lender needs to determine if you still qualify for the mortgage with the new loan included. It really makes things more complicated, which is why you need to make sure your refund can be traced.
A tax refund is a great way to get the money you need to purchase a home, but don’t go overboard. Using the money to help you pay for the closing costs or the money you need to put down on the home is perfectly acceptable. However, you should never increase your loan amount because you “came into” money. Instead, use the opportunity to save a little money without putting your future finances at risk. Remember that everything about your down payment must be traced. The lender may go as far back as asking for your tax returns to prove where the cash came from. this is strictly to protect the lender’s interests down the road.