Can you use your tax refund for the down payment on a home?

By Michael Jensen, Mortgage and Finance Guru

Edited by Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience

Updated October 20, 2020

Saving money for your down payment is one of the most significant challenges to buying a home. The good news is that you can use your tax refund to pay for all or part of your down payment, although there are several points to keep in mind if you plan to do this, as we outline below.

First, it is important to understand that mortgage lenders have relatively strict guidelines on the source of funds for your down payment. They are required to verify that you use your own funds rather than a loan that you are required to repay. For this reason, if you intend to use your tax refund to pay for your down payment, lenders require that the refund is deposited in your bank account prior to closing your mortgage.

Most lenders allow you to apply for the mortgage before the refund is in your account but make the receipt of the refund proceeds a condition to closing your loan. Once the refund hits your account and you have sufficient funds for your down payment, you receive final mortgage approval.

Use ourDOWN PAYMENT CALCULATORto determine the funds required to buy a home

When you apply for the mortgage you should also provide the lender documentation that verifies the amount and anticipating timing of your tax refund. You are also usually required to provide your tax returns for the past two years so the refund information should be included in your returns.

We should also highlight that you can use your refund for more than just your down payment including to pay for your closing costs and any reserves you are required to hold. Depending on your mortgage amount, closing costs can run thousands of dollars. Depending on your loan program, you may also be required to hold one-to-six months of total monthly housing expense -- which includes your mortgage payment, property tax and homeowners insurance -- as savings in reserve at closing. Having your tax refund available to pay for these potential expenses can be very helpful.

The final point we want to emphasize is that you usually cannot use the proceeds from a tax refund loan for your down payment on a home. Plus, in some cases taking out a tax refund loan can make it more challenging to qualify for a mortgage. This is why you are better off avoiding the loan and waiting until the actual refund proceeds hit your account before you close your mortgage.

The table below shows leading mortgage lenders in your area. We recommend that you contact multiple lenders to confirm their down payment requirements. Shopping lenders is also the best way to save money on your mortgage.

Sources

“Where can I get money for a down payment on a home mortgage?”  CFPB.  Consumer Financial Protection Bureau, February 24 2017.  Web.