For the average American taxpayer, tax season isn’t exactly a fun time—until it comes to the business of getting your tax refund, that is. Even though it’s technically money you earned, an income tax return can feel like a small windfall.
That’s not to mention what a boon it can be to those on the home buying market. If you’re looking for ways to quickly save up enough money for a down payment and catapult yourself into homeownership, your tax return can be a big help—especially since tax refunds aren’t subject to the 60-day “seasoning” period lenders require for most other kinds of funds.
Here’s how it works.
Can you use a tax return toward a down payment on a house?
The short answer: yes! A tax return can be an excellent addition to your down payment fund—or, if you’re lucky enough to get a very large return, could even be the entire down payment.
Although your income tax refund likely won’t be enough to make your down payment, cover closing costs, and start in on any necessary repairs or remodeling the house needs, it does have one very important leg up on other sources of funding: it’s already considered “sourced and seasoned.”
What does it mean when funds have to be “sourced and seasoned?”
When a home lender is qualifying a potential borrower for a mortgage, they take lots of pains to ensure that borrower is a low risk—someone who will actually be able to make their monthly payments regularly and on time. That process of gathering your financial data and assessing your financial history is known as underwriting, and basically amounts to the lender making a hypothesis about your future behavior as a borrower.
Because lenders want their money back—and, of course, the interest that amounts to their profit—it’s in their best interest to ensure you’re on firm financial footing. And that means they’re particularly wary of folks who only recently came into the kind of cash it takes to make a down payment, or worse, took out another loan in order to source those funds.
Enter the requirement that down payment and closing costs be “sourced and seasoned.” This means you must be able to show where the money comes from (its source, such as your checking or savings account) and that you must have had it in your possession for a certain minimum amount of time, usually at least 60 days (the amount of time the money is seasoned). Whether it’s a conventional loan or an FHA mortgage, many lenders have other specific requirements about where the money can come from, and may request additional documentation if, say, you cashed in retirement investments in order to come up with your deposit.
Tax refunds are special—and a great way to fund your home purchase—because most lenders consider them automatically sourced and seasoned, even if you only received the money very recently. That means you don’t have to wait out that 60-day hold period before you utilize the money to buy your dream home.
That said, even if you’re not going to get a hefty refund this year, there are plenty of options when it comes to funding your real estate down payment.
If you’re lucky enough to have some generous family members, gift funds can be a great way to stack up the cash you need to cover your down payment. However, the money probably will need to be sourced and seasoned, and the lender will need to be reassured that the person who gifted the money does not eventually expect it back.
Quontic offers a variety of home loan programs for borrowers and home-buyers of all stripes, including those who hope to use gift funds as part of their purchase. Our Community Development Loan (CDL)1 is specifically designed for non-traditional borrowers and those with irregular income, and we accept up to 100% of your down payment and closing costs in gift funds. Plus, for CDLs, Quontic only requires a 30-day asset history instead of the 60-days conventional loans may require. So, funds can be seasoned faster than a traditional mortgage.
That way, you can use your tax refund toward another part of the home buying process—or on something else entirely, like padding your emergency fund, paying down credit card debt, paying off your existing car loan or heading to the dealership to purchase a new vehicle!
Ready to learn more? Contact one of our mortgage specialists today!
1All lending products are subject to approval. Rates, program terms & conditions are subject to change without notice. Not all products are available in all states or for all amounts. This does not represent an offer to enter into a loan agreement. Other requirements, restrictions & limitations apply. Information is accurate as of April 19, 2022 & is subject to change without notice.