Homebuyers

Need a Down Payment for a Home? How to Maximize Your Tax Return

Saving for a down payment on a home is often cited as one of the top obstacles for first-time buyers. A tax refund can help you get there faster, if you know how to maximize it.

That’s where your tax refund comes in. With the average tax refund running around $2,290 this filing season, that refund could be the seed of a down payment.

The typical down payment for first-time homebuyers was 10% in 2025, according to the National Association of Realtors. However, buyers using certain government-backed loans may be able to put down just 3.5%—or nothing at all.

If you qualify for down payment assistance, you may even be able to get help covering the down payment and closing costs.

“The amount you need to put down is smaller than most people realize,” said Brennan Kolar, founder of Atlas CPA Index for accountants. “Two years of refunds and even modest monthly savings can cover a full FHA (Federal Housing Administration) down payment on a starter home.”

Here’s what first-time buyers should know about turning a tax refund into a down payment.

What to do with your tax refund if you hope to buy a home

Getting a tax refund is the easy part. Knowing what to do with it is where most people go wrong.

When you’re saving for a home, where you keep your money matters almost as much as how much you save.

A high-yield savings account (HYSA) is one of the smartest places to put your refund. It keeps the funds accessible and may earn significantly more than a traditional checking or savings account.

If you’re parking your money in a reputable company with FDIC insurance to protect up to $250,000 per depositor, your money is considered relatively safe.

Short-term Certificates of Deposit (CDs) that earn interest are another option if you don’t plan to buy a home immediately. These are often offered by financial institutions.

You may want to avoid investing in anything risky, like the stock market or cryptocurrency, if you’re planning to enter the housing market within a year or so. You may be able to earn higher returns with these investments but could also lose money if the market turns or the currency drops.

Keep in mind that lenders want to see that money sitting in your account for at least 60 days before you apply for a home loan. So, deposit the refund immediately, and let it sit.

Low down payment loans for homes are often available

The typical homebuyer doesn’t put 20% down to buy a home. The minimum down payment depends on the loan type. And for many buyers, it may be lower than they realize. That’s where a tax return can really help.

Buyers using a Federal Housing Administration (FHA) loan may be able to put down as little as 3.5% of the purchase price if they have a credit score of 580 or higher.

U.S. Department of Veterans Affairs (VA) loans and U.S. Department of Agriculture (USDA) loans don’t require down payments.

If you’re a veteran or active-duty service member, a VA loan offers zero down payment with no private mortgage insurance. This is why the VA loan is considered one of the best mortgages available for those who qualify.

USDA loans are also no down payment loans, designed for buyers in eligible suburban and rural areas who meet income requirements. Many buyers don’t realize they live in a USDA-eligible zone, or that they fall well within the income limits.

“Many people underestimate the USDA loan program, yet I have seen it successfully help buyers purchase homes in small towns and suburban areas with zero down payment,” said real estate investor Shawn Zar.

So, you can absolutely use a tax return for a down payment. And with an FHA loan down payment starting at 3.5%, your refund could cover a significant chunk of what you need.

Down payment assistance and how it works for homebuyers

There may also be money available to help first-time and other homebuyers with their down payments. Most just don’t know about it.

Down payment assistance (DPA) programs offer a variety of grants, forgivable loans, and deferred payment loans to help buyers cover upfront costs of purchasing homes. The specifics typically depend on the program.

Grants require no repayment at all. Forgivable loans disappear after you’ve lived in the home for a set period, typically five to 10 years. Deferred loans charge zero interest until you sell, refinance the loan, or move.

Programs vary by location and often have income limits. Many buyers may be surprised that they qualify and may be able to combine their tax refund with a DPA program.

“Stacking the two together can cover the down payment and a chunk of closing costs on an average purchase,” said Kolar.

The average down payment on a home doesn’t have to come entirely out of your own pocket. Between low down payment loans, assistance programs, and a well-placed tax refund, homeownership may be closer than you think.

What not to do with your tax refund if you’re buying a home

Once you receive your tax refund, it becomes part of your financial picture. Any large, unexplained purchase or sudden dip in your account balance can raise red flags when you apply for a home loan.

“Aspiring homeowners should avoid using their tax refund to acquire new debt, purchasing big ticket luxury items, and reducing all credit down to zero while not having any type of savings,” said Sherman Standberry, CPA and CEO of My CPA Coach.

Chicago real estate broker Mike Opyd, of REMAX Premier, recalled a home purchase that almost fell apart a week before the closing. The co-signer used part of the tax refund to buy a $75,000 car. The transaction only survived because the co-signer liquidated investments to cover the gap.

The takeaway: once you’re in the homebuying process, treat your refund like it’s already spoken for, because in many ways, it is.