If planning to buy a home in California, you should consider these eight ways to maximize the use of your tax refund before blowing that money at the casino.
FACT: Using your IRS tax refund for a down payment or to pay closing costs is allowable and an acceptable source of funds to purchase a home.
These funds do not have to be ‘seasoned’, contrary to what many believe. You’ll just need to make a copy of the cleared Treasury check and/or document the refund was deposited into your checking/savings account.
What Is The Best Use Of Your Tax Refund When Buying a Home?
1. Tax Refund to Pay Closing Costs
Do you have an accurate estimate of ALL closing and settlement costs? I’ve found most lenders underestimate total funds needed for closing so don’t trust your lender to be as accurate as you think they should be.
Do you know which closing cost assistance or grant programs you may qualify for? I’m guessing your lender hasn’t even mentioned this option for you…..trust them if they say you don’t qualify. Many lenders tell prospective home buyers they won’t qualify because they themselves are not approved to offer the assistance programs and don’t want to lose you as a customer.
Do you know the best way to get the seller to pay your closing costs so you can use your tax refund for something else? Or do you know how a mortgage lender can get you a credit to pay nearly all your closing costs?
2. Tax Refund for Down Payment on a Home
Most people use their tax refund for their down payment. But what if you could qualify for a down payment assistance program which would enable you to use your tax refund for something else?
3. Tax Refund for Earnest Deposit
Many first time buyers don’t realize they’ll need to write a large check for an earnest deposit check up front in order to execute their purchase contract. You may want to use your tax refund for this purpose.
4. Tax Refund to Buy Down the Interest Rate
Did you know you can choose the interest rate you want? Read this for some transparency about the mortgage rate you qualify for. Most lenders won’t explain this to you and still try and sell you a higher rate than you deserve…it’s sad.
If you are flush with cash, maybe it would make sense to buy down the interest rate (via points or discount fee) another .125% or .25%. Do you know how to determine the net benefit savings from this?
5. Tax Refund to Buy out or Eliminate PMI (Private Mortgage Insurance)
Few home buyers are ever told this but it’s possible to put less than 20% down on a conventional loan and not pay monthly PMI (private mortgage insurance). In fact, you can buy a home with as little as 3% down with no monthly paid PMI.
You can use your tax refund to buy out or eliminate the need to pay PMI each month.
Is this worth doing? The only way you will find out is by contacting me and conduct a comparison of your options.
6. Tax Refund to Buy Appliances, Furniture, Carpet, or Window Coverings
When buying a home you may need to buy appliances, furniture, new carpet, paint, or window coverings…that stuff isn’t cheap. Nothing worse than finally owning your own home and not being able to furnish or customize it a little bit. Make sure you budget for this.
7. Tax Refund to Meet Reserve Requirements of the Loan Program
Make sure you know whether your loan program requires you have sufficient reserves in savings as a condition of the loan. If your approval is on the border, having 2-6 months PITI reserves can make the difference between approval and denial in many cases.
8. Tax Refund to Pay Off/Down Debt or Pay Off Collections
Perhaps your tax refund may best be used to pay off debt to help you qualify for a larger loan by reducing your debt-to-income ratio.
Be careful, you may not be able to pay off or pay down debt after you have submitted an application. Many banks require the debt be paid off before you apply….so make sure your loan officer knows what the heck they are doing and plan accordingly.
Or, maybe the underwriter will require a collection be paid off as a condition of loan approval….use your tax refund for that. If you have collections, you should consult with me BEFORE you do anything because in many cases, collections do not have to be paid, and can even cause your credit scfore to go DOWN if you pay a collection.
Still Not Sure How To Best Use Your Tax Refund When Buying A Home?
Maybe you don’t need to use your tax refund when buying a home. Maybe it would make more sense to invest it! But how should you invest it?
I can refer you to a local, reputable, and trusted Certified Financial Planner if you’d like to explore that option.
If you are planning to buy a home in California and want to discuss these eight options and maximize your tax refund when buying a home, call me direct (951) 215-6119 or contact me to schedule a time.
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