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Would like advice on current situation. Current home was just paid off... We are looking to upgrade to about a 400-500k house. Have put majority of assets into our existing home, 401k, and 529s. Household income in upper 100s. Zero debt/loans/liabilities...Zero credit card debt FICO scores are ~800

The dilemma - we want to buy the new house before selling the old one, and do it without a contingency contract for selling existing home (for a variety of reasons).

While our networth is high (house which we own outright is worth ~200k, 500k in 401k, 80k in 529 plans), our readily available funds are only about 35k or so.

I am thinking about taking out a 401k loan for both me and the wife (so we could borrow 100k) toward down payment (basically giving myself a bridge loan). The loan would be paid off in its entirety as soon as the existing house sells. Looking at bridge loans, this seems like a much better option, gets us out of PMI, overall cost to us is lower, etc. We are financially in a position where paying the 401k loan, along with new mortgage isn't a issue, and would continue to contribute to 401k to get that free company match (and would comfortably meet the standard debt to income ratios).

Anyone have any experience doing this? We will be talking to loan officers in near future, and I am trying to educate myself ahead of time.

Is a loan officer going to have a issue with me using that amount of money from a 401k plan as down payment? So long as I show the 401k loan payment as a liability and still meet typical debt/income ratios does it really matter?

Advice/suggestions/experiences

Thanks

Member Summary

1) Shouldn't be any issues with using a 401k loan towards down payment. Just to avoid hassle though I would remove it at least 2 months before you go through the mortgage process or they'll demand to know where all that money came from(the answer might be acceptable, but they could end up asking for a bunch of documents and multiple times of each since lenders often times can't seem to keep things organized).

2) Arguably a 401k loan payment is not a liability. It doesn't report to any credit bureau because it's not technically speaking a loan(a loan to yourself is not a loan it's a move of money from left pocket to right pocket). It's called a loan to prevent tax arbitrage of a person getting capital out of a 401k plan after taking the deduction(because that would be the most advantageous thing to do). Might want to ask someone else about disclosing the 'debt service' on that one.

3) That said there is still a potential tax arbitrage of doing it. Once you have the deduction you want money out of the 401k plan if you can. There is only one way to do that without triggering a taxable event and that is 401k loan. If your plan offers a low interest rate and you can then get a return on that investment elsewhere that is higher(such as avoiding PMI and mortgage interest) than you get a tiny tax benefit equal to the the spread between that outside yield and your 401k loan interest rate times you marginal tax bracket. If the reverse happens and the 401k loan interest rate is higher than the interest rate outside of the 401k you get a small tax loss equal to thread spread times your marginal tax bracket.

4) Obviously the main issue is if you have to change employers without having the liquid assets to payoff the 401k loan. In that instance the inability to pay it off creates a distribution as a taxable event causing ordinary income taxes + penalty on the balance. I read your post correctly that doesn't seem to be a risk with you.

Same as above poster, but I wanted to highlight a couple things:

1) In order to avoid lender questions, take the loan and deposit the funds, then wait until you get your third bank statement, so that you can provide the lender with two statements with the money already in the account (the first statement will show the deposit). That's a long time to wait, though, so find a knowledgable loan officer and ask them about the challenge of taking that kind of loan.

2) If your employer handles 401k loans by payroll deduction, you'll have to explain that to the lender because they are going to want at least 2 months worth of pay stubs. Sounds like you'll be fine on the DTI ratio, though.


Also, given your income, I would guess you aren't expecting any financial aid for the kiddo(s), but I wanted to point out for others that a ROTH IRA can be a better investment vehicle than a 529, since 529s are counted toward your estimated family contribution, and a ROTH lets you withdraw contributions at any time for any reason without penalty, while 529s only let you withdraw proportionally your contribution and earnings, and you pay tax and penalty on unqualified withdrawals. Also, lenders will view the ROTH as an asset, and in my experience they did not view the 529 in the same way. However, if your state offers a tax break on the 529, that might offset.

monkeydollars said:   Also, lenders will view the ROTH as an asset

I thought qualified money wasn't considered in mortgage underwriting until your 59.5 years old or are already distributing it(which then counts as income and not an asset)?

dshibb said:   monkeydollars said:   Also, lenders will view the ROTH as an asset

I thought qualified money wasn't considered in mortgage underwriting until your 59.5 years old or are already distributing it(which then counts as income and not an asset)?

ROTH contributions are able to be withdrawn at any time, for any reason, no matter your age, without penalty. That could be why ROTH IRAs are considered liquid assets during underwriting. In other words, that money is readily accessible if needed, whereas a 401k is not without significant penalties and taxes.

jaytrader said:   dshibb said:   monkeydollars said:   Also, lenders will view the ROTH as an asset

I thought qualified money wasn't considered in mortgage underwriting until your 59.5 years old or are already distributing it(which then counts as income and not an asset)?

ROTH contributions are able to be withdrawn at any time, for any reason, no matter your age, without penalty. That could be why ROTH IRAs are considered liquid assets during underwriting. In other words, that money is readily accessible if needed, whereas a 401k is not without significant penalties and taxes.


So this is verified that Roth balance is treated the same as money in a bank? I'm rather shocked that I wasn't aware of this.

dshibb said:   jaytrader said:   dshibb said:   monkeydollars said:   Also, lenders will view the ROTH as an asset

I thought qualified money wasn't considered in mortgage underwriting until your 59.5 years old or are already distributing it(which then counts as income and not an asset)?

ROTH contributions are able to be withdrawn at any time, for any reason, no matter your age, without penalty. That could be why ROTH IRAs are considered liquid assets during underwriting. In other words, that money is readily accessible if needed, whereas a 401k is not without significant penalties and taxes.


So this is verified that Roth balance is treated the same as money in a bank? I'm rather shocked that I wasn't aware of this.


Generally, lenders will count retirement accounts (IRA's/401k's) as assets as long as you have access to withdraw the funds without restriction (so, 401k funds that you can't withdraw while at your current employer won't count, or unvested funds, etc.).

If the funds are accessible, and invested in stocks, bonds, mutual funds, etc., then the lender will discount them by 30% to account for volatility. If you are under 59.5, they will discount by another 10% for withdrawal penalties. So total 40% discount if accessible, invested, and under 59.5.

They don't make a distinction between Roth IRA's and Trad. IRA's. One person could have $60k in a Roth where none is subject to withdrawal penalty, and another could have $60k where the whole balance is subject to 10% withdrawal penalty. I doubt lenders (and most borrowers) would want the hassle of adequately documenting the history of a Roth to get another 10% of that portion of the account that represents contributions for asset reserve purposes.

To the original question, using a 401k loan for down payment is an acceptable source of funds, and the loan repayments will have to be disclosed (whether or not reported on your paystub) and factored in to your "debt to income" ratio (but sounds like that isn't an issue).

As you mentioned, you should confirm with the lender you end up choosing, since their policies can deviate, but these are the standard guidelines.



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