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There is a Risk involved with using your 401K Account as your Down Payment

Sometimes finding a home can be a long process, but you did it. You have finally found the home of your dreams. Now there is one thing that stands between you and your new home. It’s the Down Payment.

using 401K as your down paymentSome home buyers are looking to use their funds from their employer’s 401K program. There are a few things to consider when using these funds. First and foremost, these funds can not always be accessed unless you have retired, leave the company, or become disabled. Some companies will allow a ‘Hardship Withdrawal’, which is when there is an immediate and heavy financial need, including the purchase of the employee’s principal residence.

Sounds great, right? Well, the drawback to using these funds as a ‘hardship withdrawal’ is that you will pay taxes and penalties on the amount withdrawn from your plan, which often must be paid in the same year of the withdrawal. And while ‘Hardship Withdrawals’ are allowed by law, your employer is not required to provide them within your 401K plan. Before assuming you are able to withdraw these funds, check with your employer’s HR Department to confirm that your 401K program allows for ‘Hardship Withdrawals’.

Another approach to using your 401K program is to borrow against it. You can often borrower as much as 50 percent of your account balance. You will be required to pay interest on the loan, but the interest payment goes right back into your 401K account. The extra bonus about borrowing against your account is that the money is not taxable as long as it is paid back. Typically the payback period can be anywhere from five to thirty years.

A risk to point out when borrowing these funds is that you will be required to pay back the loan IN FULL, should you lose your job or leave your employer. This payback requirement is short, sometimes in as little as 60 days. If you are unable to pay it back within that time, the “loan” now becomes a “Withdrawal” and is subject to the same penalties and taxes as mentioned above. And although your 401K account can be rolled over from one employer to another employer without penalties, the loans from the 401K can not.

When the lender calculates your Debt-To-Income ratio, they 'may' include the payments you are making on your 401K account along with your car payment, credit card payments, student loans, etc. 

Something to note - FHA and FNMA do not require the lender to include the 401K loan payments towards your DTI ratio. However, there are a few lenders that will consider this payment against your DTI anyway. Before you borrower money from your 401K, be sure to check with your lender to ensure this will not be an issue to fund your loan.

 

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Texas Home Loan Expert

Frisco TX Mortgage

      

 

The views expressed on this site are mine alone and do not reflect the views of my employer.

Comment balloon 8 commentsJohn Cannata • September 30 2010 01:17PM

Comments

John this is an excellent post on the subject of down payments/funds for real estate transactions using a person's 401K. ell written and succinct and great info for both buyers AND agents!

Posted by Russell Lewis, Broker,CLHMS,GRI (Realty Austin, Austin Texas Real Estate) almost 8 years ago

Sounds like a buyer may have to "break a leg" and walk with a limp to qualify! ;)

Posted by Greg Nino, Houston, Texas (RE/MAX Compass, formerly RE/MAX WHP) almost 8 years ago

Thanks Russell. This came up recently and I thought Id share some thoughts on it.

Too funny Greg, but I guess you are right. They can avoid certain penalties by being injured. Hopefully no one really tries that.

Posted by John Cannata, Texas Home Mortgage - Purchase or Refinance (214-728-0449 http://TexasLoanGuy.com) almost 8 years ago

John... this is some good information about what to think about when possibly using your 401-k plans when buying a home. Consumers need information broken down properly in order to make an informed decision. Nice job here..

jeff belonger

Posted by Jeff Belonger, The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans ( Social Media - Infinity Home Mortgage Company, Inc) almost 8 years ago

Great info John and buyer "beware" when considering this option.

Posted by Karen Otto, Plano Home Staging, Dallas Home Staging, www.homes (Home Star Staging) almost 8 years ago

Jeff - Thanks for the comment and also for your feedback on creating the post.

Karen  - Thanks!

Posted by John Cannata, Texas Home Mortgage - Purchase or Refinance (214-728-0449 http://TexasLoanGuy.com) almost 8 years ago

John-  Great Information about 401K rules.  These little things are the difference between making a loan work right or wrong.

 

 

Posted by Gary Miljour, Mortgage Originator NMLS Licensed in AZ and NC (loanDepot) almost 8 years ago

So true Gary.

Posted by John Cannata, Texas Home Mortgage - Purchase or Refinance (214-728-0449 http://TexasLoanGuy.com) almost 8 years ago

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