debt to income ratio and 401k loans

It shows on your balance sheet as a decrease in your net worth, if you put the net value of your 401K on your balance sheet. I believe the lender would not list it as debt, but just list the 401K account less the loan as an asset.

As debt, it is a wash from the lender's perspective, since it is fully secured. No-one will come after you if you don't pay it, taking money that could have gone to your mortgage payment, other than the taxes owed. but that is little different from any other appreciated asset. Furthermore, if you got in a serious jam, you could stop your contribution to increase your monthly cash flow, although you would lose your employer match.

It can get you a chunk of your down payment, and from a long term investing perspective, your house and your 401K are both reasonable investment choices, each with their tax benefits.

The downside is that you don't have appreciation on that amount of investment assets, but you do have interest, which of course you pay, with no tax deduction. But you also have the possibility of appreciation on your house, and its tax deductions for interest and property taxes to compensate.

 

I've done 3 mortgages, with 3 different lenders. 401K loan has never been an issue.

To ensure you are getting competitive market terms, check with more than one lender.

 

Did you borrow against this 401k to purchase your home. With my experience doing mortgages or refis, if you have borrowed against your 401k to buy this home, it should not show up on your credit report, if this is the case. It is something that they just do not report unless you dont pay and it goes to a collections agency or some sort.

It would not benefit this company to push up your debt to income ratio because it may just push you out of getting a line of credit or refi.

As for them trying to get your DTI up to get you a higher rate should not be the case. Let me explain, there is a threshold for DTI which is 50-55% on all types of loans. There are 3 things in which we look at that determines your rate.
1: LTV= Loan to Value
2: DTI= Debt to Income
3: FICO score

To make it short, if you have a good FICO at least 560-580, and a good LTV and DTI not exceeding 50-55%, then you should get a good rate.

The only thing that would get you a higher rate (possibly a higher rate) is your fico score.


This is just the basics but without all the information it would be hard to give you more exacts per your own situation.

And you are right, he may be wanting to add more debt to make the loan amount higher becasue we all get paid a commission on the loan amount.

 

Debt sitting in a 401K loan should make your FICO higher than the same debt sitting on credit cards, due to lower apparent debt to available credit limit, all other things being equal. Furthermore, its rate is locked, and can't be jacked. FICO doesn't know how large your 401K is, any more than it knows how much cash you have in your bank accounts.

 

There would never be a reason for the 401K administrator to report a 401k loan to a CRA, regardless of the purpose for the loan, nor have I ever seen one reported. The loan is made by cashing out existing assets in the account. The payments just go back in the account, and if you fail to pay, they can just send a 1099 or whatever reporting a 401k withdrawal prior to 59-1/2, for which you would be responsible for taxes including penalty. There would never be a case where they would have to come after you to collect; it would just be converted from non-taxable loan proceeds to a taxable withdrawal.

I believe there may be ways of pulling out 401K money without early withdrawal penalty, but with normal income taxes due, such as for medical expenses.

I am not suggesting that it is a wise investment decision to cash out 401k money, with tax and penalty consequences, even to buy a house. It may, however, make sense to use a 401k loan as part of raising the down payment, due to the tax-favored advantages of home ownership.

As a general strategy for saving for both a home and retirement, 1) putting as much as you can into a 401k with employer matching for several years, then pulling some out by loan, probably works better than 2) trying to invest the same amount safely enough in taxable investments to accumulate a down payment. If you do (2), you will be hit with the cap gains all at once as you make your down payment, possibly pushed into a higher bracket, and only have part of a year of interest and property tax deductions to offset it in your first year buying your first house. (1) defers the tax hit from raising some of your down payment by making it a non-taxable, off-balance sheet loan, while allowing the original 401k contributions to be made pre-tax as you are saving in preparation to buy. This also allows your investment risk to be, in effect, a tax deductible risk, at your highest marginal rate, as it is in the tax deferred 401k account.

The tax code does not reward wide changes in income.

 

my question to sass77 was to find out if the 401k was borrowed against or if a loan was taken out to pay back the 401k. If a loan was taken out to pay back the 401k then yes it would increase the DTI and would be reported because it would be another tradeline.

 

It depends on the lender. The company I work for used to use this in your dti, but about a year ago they changed their guidelines. Another company I interviewed with (First Franklin) uses this in the dti. It depends on the lender.
The sad thing is that the lender tells you your outstanding conditions, etc, and you can either gather the info, go along with what they say, or go to another lender.
Start looking for another lender, just make a few calls, ask them upfront if they use your 401k against you.

 

Thank you Deelyn, you are right on track and that what I was trying to determine. Yes some lenders have the option of leaving this out of the DTI and some uses it. From the lenders I use they sometimes are able to delete or not use up to 2 debts and for the most part if the debt is over 2 years old (even though its in collections) they will "forgive or overlook" the debt and this will decrease the DTI.

 

I would like to share a article 401k withdrawal rules for your question.

The article is at bankonyourself.com/401k-withdrawal-rules

 

This is so old that the posters aren't around anymore. Besides, things have changed dramatically since 2005.

 

Right

you are right, Things on 401k have changed so much. It kind of hard to keep it all together. So if you need any advice on 401k you know where to go.