It’s tax refund season! Every year April brings a frenzy to button up all our tax documents and file our taxes before the mid month deadline. Whether you opt for online software, use an accountant, or qualify for the Volunteer Income Tax Assistance (VITA) program, completing all the tax forms and submitting your financials to the IRS always takes quite a bit of work.
The work comes with a bright side if you qualify for a tax return. In some cases, the refund adds up to quite a sum. According to Smart Asset, the average Californian tax refund is $2,810.
For many families in California, particularly in the Orange County area, $2,810 is a substantial amount of money. That is the equivalent of saving just over $200 a month for the entire year. For some families, saving that amount each month can be incredibly difficult. Many of the families we work with have budgets that are tight as it is. Oftentimes, unforeseen expenses pop up throughout the year that deplete monies earmarked for bigger goals.
Which is why the possibilities of applying a tax refund to a bigger and life-changing goal is so exciting. If you’re joining the nearly 80% of American who receive a tax refund each spring, we would like to invite you to explore how it can help you achieve your homeownership dreams.
Applying a Refund to a Down Payment
There are specific rules around the types of funds that you are allowed to use toward your down payment. The bank wants to ensure that you are able to save funds on your own. This reassures them that you will be able to pay your mortgage each month. Depending on your loan requirements, you will need to meet different minimum amounts that you bring to the transaction.
The good news is that your tax refund is considered money you saved! Technically a refund is money that you overpaid the government during the course of the year. This means that there are no requirements dictating how long your refund needs to be in your account before you use the money.
Using a Refund in Combination with Down Payment Assistance Programs
First-time buyer assistance programs typically require a down payment ranging from 3%-5% of the house value. In Orange County, we live in one of the areas of the country with higher costs of living. A modest two-bedroom family home here can average $350,000. That means a down payment of $10,500–$17,500. While $2,810 is a great start to savings those funds, the entire amount can be a little daunting.
That is where our down payment assistance programs come in.
We offer specific programs designed to get first-time homebuyers into homes by matching funds going toward the down payment or closing costs. If you previously owned a home, but lost it in a short sale or foreclosure, you are reclassified as a first-time homebuyer. This means that you can qualify for down payment assistance programs as well.
Both the Workforce Initiative Subsidy for Homeownership (WISH) and the Individual Development and Empowerment Account (IDEA) programs allow you to apply your tax refund toward a matching down payment grant. Each program matches up to $15,000 in their 3-to-1 down payment grant. To receive the full $15,000 in assistance means that you only need to raise $5,000. While a $2,810 tax refund seems daunting to cover the full 3%-5% down payment, it brings you extremely close to $5,000.
If you need a few months to save the remaining amount, the IDEA program works with individuals and families for up to ten months to save their down payment. If you choose to move forward with your current tax refund, the program would match that amount 3-to-1. With our current refund example, that would be adding $8,430 to your down payment. A $300,000–$350,000 home is within reach!
Being Intentional With Your Refund
According to a Georgetown Institute for Consumer Research 2015 finding, 30% of consumers plan to spend their tax refund by either buying a treat or purchasing something needed. They also noted that individuals who saw a refund as an end-of-year bonus were more likely to spend their refund at a store they typically didn’t shop at.
This year make an intentional plan on how you can use your tax refund to improve your family’s financial position. For some families, this can be a step toward homeownership. For others, it might be time to pay down debt or save an emergency fund.
If you’re unsure that putting your tax refund toward your down payment is the best financial step for your family, connect with one of our homebuyer coaches. Our experienced professionals at NeighborWorks Orange County are HUD-approved counselors who can help you build a personalized road map toward homeownership.