How to Buy a House (With a Little Help from Your Tax Refund)

Expecting a tax refund this year? If so, you may have spent it several times over in your mind before you even receive it. But how about using this year's refund for something that will really make a life-style difference -- how about using it to buy a house?

Obviously, your tax refund won't by a whole house, but conditions this year are such that a refund can give you a significant boost towards home ownership. The average federal tax refund could get you halfway towards a down payment that can make you a homeowner before it is time to file next year's taxes. This article will walk you through the step for how to buy a house with a little help from the IRS.

How Far Can Your Refund Take You?

Can a tax refund really represent a significant step towards home ownership? The answer is yes, thanks to the return of 97 percent mortgages that only require three percent down.

For many would-be buyers, the down payment represents a significant hurdle. Even if you could afford the monthly payments once you purchase the home, trying to save for a down payment while still paying rent and other expenses is often too much of a stretch. However, late last year, the federal government cleared the way for the return of "community" mortgages that require just three percent down. Fannie Mae's 97 percent loan is called "My Community Mortgage," and it's available now, and Freddie Mac's is called "Home Possible," and it's rolling out in March.

According to historical data from the IRS, in recent years, the average individual tax refund has been about $2,800. Suppose you used that to get halfway towards a down payment, for a total down payment of $5,600. With a 97 percent loan, that could get you a mortgage of $186,667. According to the National Association of Realtors, this is more than the average price of existing homes in the Midwest ($159,100) and the South ($184,100). You might have to do a little more bargain shopping in the Northeast and West, where homes are more expensive, but in any case, the combination of a tax refund and a community mortgage can give your ambition of owning a home a powerful boost.

How to Buy a House, Courtesy of the IRS

So how do you follow through on this, and parley your tax refund into home ownership? Step-by-step, here is how to buy a house with some help from your tax refund.

1. Check your credit report. This should be an early step (it's totally free at LendingTree) whenever you are contemplating any major purchase, because if there are problems with your credit score, it can take time to address them.

2. File your 2014 taxes as early as possible. When it comes to getting a refund sooner, this is more than just a case of early-in, early-out. Processing times for tax returns are typically shorter if you can avoid the rush of deadline filers as April 15 draws near.

3. Look for assistance. Community mortgages often work with government or charitable organizations to provide down payment assistance to eligible borrowers (usually that means people with low-to-moderate incomes). Search for "home buying assistance in (your location)" and see if you can get a grant or loan for the rest of your down payment.

4. Budget. Look at your income and expenses to determine two things. The first is how much you can save each month in your current situation. That will give you a target timeframe for how long it will take for additional savings to supplement your refund enough to make a down payment. The second budget stage is to determine how much of a monthly mortgage payment your income will bear. You can then use a Home Affordability Calculator to determine how much house this will buy; your target price should be the lesser of what your down payment or your monthly payment can support.

5. Lock up your refund. Once you know how long it will take you to save the remainder of your down payment, put that money in a certificate of deposit with a roughly similar term. This will earn you more interest than just keeping the money in a savings or checking account, and will help you avoid the temptation of spending some of it in the months ahead.

6. Inquire about community mortgages. These programs are backed by Fannie Mae and Freddie Mac, but they are offered by independent private lenders. Start talking to lenders about the requirements for these programs before you are actually ready to apply for a loan, so you can be confident that you will qualify when the time comes.

7. Compare quotes from multiple lenders. Since those low down payment programs are offered by a variety of private lenders, rates and other terms will vary. With details such as your income, credit score, target home price, and planned down payment, you can get quotes from lenders that are specific to your situation, to increase your chance of getting the best deal.

8. Start house hunting. This is the fun part, but it can also take a long time. Start once you have a feel for your target price and your timeframe, so you can be ready to act as soon as your down payment is up to speed.

You may not receive a refund as big as the national average, but if you receive any refund at all, the general principle still stands. That refund can be the cornerstone of your down payment savings, and with the return of 97 percent mortgages, it should be much easier now to save the rest of the money you need to buy a house.

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