The beginning of a new year is upon us. Many of us have set high goals and resolutions for 2017 such as getting healthier, building better relationships, saving more money or moving up the career ladder. Another big goal that you may be considering is buying your first home. It is an exciting prospect and means a whole new chapter of growth and responsibility in your life.
However, just like any big changes in your life, it can also be an intimidating prospect. There will be lots of new things to consider if this is your first time buying a house. Owning a home is obviously preferable to renting, but it does bring about new responsibilities. The first thing you will be considering is the down payment and initial expenses of buying your new home. One thing you may not have considered yet is another exciting event that comes early in a new year, receiving your tax refund.
When we are young, many of us are excited to get our tax refunds so we can go on a shopping spree. As you get older and gain more maturity, you realize that there are many better uses for a large sum of money. If you are considering buying a new home, a tax refund could be the key to making that dream come true.
In this article, we will discuss the best ways to use your tax refund to help you buy a home. Obviously, it can be used to pay all or some of the down payment, but there are many other uses for your refund that can aid in buying your first home. Some of these are things you may not have considered to this point but are crucial aspects of getting the best mortgage with the best rate and successfully putting yourself in the best financial position once you are in your new home.
This is one of the first expenses you must consider when buying your new home. Most of us think of the standard down payment as 20 percent of the total home cost. While this is still the ideal amount, there are many other options available to first-time buyers that help you get a new home and be in a better financial position to start. Some of these include:
- Conventional Loan: 3% or more down payment
- Down Payment Assistance: 3-5% of the first loan amount to provide down payment or pay closing costs on the purchase
- FHA Loan: 3.5% down payment
- USDA Loan: No down payment required
- VA Loan: Now down payment required
Depending upon your credit, current assets and other financial considerations, you could qualify for a lower down payment than you had originally imagined. You could even qualify to buy your first house with no down payment at all. If this is the case, that does not mean you should still use your tax refund for that shopping spree. There are many more expenses of buying a home that could be covered with the money.
How to Use Your Refund With No Down Payment
After the down payment is out of the way, the next thing to consider are the closing costs. Many first-time buyers make the mistake of believing this included in the down payment amount. It is not, but if you do not have to use the money on a down payment, your tax refund could be used to cover 100% of your closing costs.
You could also use the money from your refund to pay down your current debts. This is one of the key aspects that lenders look at when considering your mortgage qualifications. Paying off current credit cards or other debts will raise your credit score and could go a long way in getting you a better interest rate on your first home.
Lenders also look at your current assets, including the amount of money you have in the bank at the time of your application. If you simply leave the money from your tax refund in the bank, it can also aid in the lending process.
However, if leaving the money in the bank is your plan, there is one crucial mistake that many people make that could hurt you. When a tax refund comes in, many people will immediately cash the check or withdraw the entire amount as cash to use on various expenses. Even if you later redeposit the money, lenders will be unable to verify the source of the money. This is a mistake that could hurt your loan consideration and is completely unnecessary. It is best to leave the money– or at least as much as you can– in the bank while you go through the application process.
Aside from the costs directly associated with the home purchase, there are additional expenses that will arise once you have purchased the home. Your tax refund could be used for insurance, inspections repairs and many other uses that will put you in a safer financial position in your new home. It could also be used for movers, new furniture, curtains, decorations and things that will brighten the house.
Another thing you may have overlooked that is crucial for a homeowner is an emergency fund. Every homeowner should have some money saved in a fund in the case of storms or other emergencies that could damage your home. There are also smaller issues that are inevitable at some point like plumbing problems, pest issues, various cleaning, lawn care, etc. The money from your tax return is the ideal beginning of a homeowner emergency fund.