I did a search here on 401k loan information toward a mortgage to help with the down payment and did not find much, sorry if I tried some bad searches and the information is on this site. Does anyone know if it would be a good idea to borrow from a 401k to boost the down payment? I do not know if they usually they consider this as debt/income ratio. Also I have read that loans paid off within a certain amount of months are not considered in the long term of a mortgage. I was thinking SHORT TERM 401k loan maybe would not count? around 5k. My discharge of B.K was 18 months ago and the true FICO scores just broke the low 700 area on EQ + TU, EXP FACO is going to break 700 soon with updates. I am looking at a 150k house with 8k ready before breaking into the 401k. Any suggestions, comments, or questions would really help! Also I have 8k in credit lines now with only $100 of credit card debt and no car payments or loans, that is why the scores are O.K and I do not need anymore credit cards, just a mortgage. Is their anyone that can help me here?
401K, life insurance and other type loans like these will not show up on your credit report, so they will not affect your FICO score. I may be wrong, I am not an expert. www.creditsense.com
In my humble opinion tapping into your 401(k) or any retirement program should be a last resort for a downpayment on a home because of the following: 1) A portion of your 401(k) acccount balance is used as collateral for the loan. To that end, those funds are taken out of the market for the duration of the loan term. Although you are paying yourself back interest, typically 401(k) loan rates are nominal (prime + 1.0%) so you would do better with your money invested. 2) Your loan is also contingent upon your continuing employment. If your employment is terminated you loan becomes immediately due (most programs have grace periods e.g., 90 day grace prior to asking for the balance in full). If you can not pay the balance in full, it is treated as a early withdrawal subject to income taxes as well as an early withdrawal penalty. Okay now that I got that off my chest. Typically, your 401k loan is not reported to the CRAs. I would confirm this info with your plan adminstrator to be sure. It also depends on how much money you are taking out. If you are trying to get your down payment high enough to avoid paying PMI that might be enough to tip the scales in favor of doing so.
Based on my personal experience doing this (not any expertise !), I'd say the above two posts address your question quite well. The only thing I would add is that in the current economic environment, consider well the risk of a)unemployment occurring and b) the risk of even more lost investment appreciation opportunity should the stock market recover nicely while you have the money out of the 401(k) (of course, the converse scenario is the probability, perhaps less, of the market remaining flat while you pay back into the 401(k)). HTH
Re: Use 401k 4 a down payment mortg It is my understanding that the IRS allows you to withdraw (not borrow) funds from your 401K under certain circumstances, and one of the circumstances is down payment for a home. It would not be a loan, you don't have to pay it back. Since I am considering doing the same thing I have perused the IRS site and they confirm this. I don't have the particulars handy but you will have to pay taxes just like any other kind of income but there will be no penalty charged. Personally I think that planning on your home increasing in value is a much better plan than depending on the stock market increasing your 401K. I'm a follower of Suze Orman and she makes this pretty clear, invest in the known (you will need a home to live in, uncle sam won't let you live with him) before you invest in the unknown (the stock market).
Re: Re: Use 401k 4 a down payment mortg Specifically the penalty fees are waived for withdrawing money if you are using the money for your FIRST home--just to clarify. Whether or not it's a good idea depends on your age and the amount you have in your 401 (k) as well as the aforementioned stability of your job. Here is an article from Bankrate.com that addresses some of the original questions in the first post of the thread: http://www.bankrate.com/brm/news/mortgages/20030417a1.asp
Re: Re: Use 401k 4 a down payment mortg Is this true whether you're withdrawing tax deferred or after-tax contributions, or either ?
You could probably get a mortgage with what you already have and leave your 401k alone. It looks like you could get an FHA loan based on the info. you provided. Check with some of the mortgage people around here. I'm sure they'll be around soon. Good luck.
Re: Use 401k 4 a down payment mortg Personally I think that planning on your home increasing in value is a much better plan than depending on the stock market increasing your 401K. I'm a follower of Suze Orman and she makes this pretty clear, invest in the known (you will need a home to live in, uncle Sam won't let you live with him) before you invest in the unknown (the stock market). juliedeale ================== The problem with depending on a homes equity is the one of liquidating ? How do you tap into it when or if you need the money? The solution is not one of either buy the home or save the money. Why do one or the other when you can do both??â?? BTY I have seen her give some bad advice. THE END ** *** ** LB 59 """""""""```~~~```'"""""""""
BTW, I don't advocate borrowing from any of these sources. Always borrow unsecured credit and always try to lower your interest rate payments by shuffling your debt to lower rate cards. If you build your credit, you can borrow at very reasonable rates, much lower than prime + 1. www.creditsense.com
I agree with Mel also. It's not a good idea to borrow from your 401(K) plan at all--it's for retirement. Even though you pay yourself interest, you do lose the income from the investment. Check out Butch's thread on the Rule of 72--you're losing doubling time here. A big mortgage isn't a bad thing. Check out the web site and several books by Ric Edelman (ricedelman.com). He is a big proponent of big, long mortgages. In fact, he used to have a brochure, and probably incorporated into his books, 15 reasons to carry a big, long mortgage--and never pay it off. He makes a lot of sense.
1*Ways to leap over the down-payment hurdle 2*biggest home-buying mistakes http://www.bankrate.com/brm/news/mo.../20030417a1.asp ================= 1*My favorite way was not listed here. 2*They also missed an important one here too. THE END ** *** ** LB 59
30ftshadow thanx for the article, also everyone else. I did a short term 401k loan on the same 401k account early in 2002 to establish credit on a couple of secured credit cards and it did not show up on the credit reports. The way the market went it wasn't a bad idea at the time. I have more credit cards now then I need at O.K rates, but do not need to carry a balance on these because they would effect the debt/income ratio, along with FICO and a future mortgage. Suze Orman advise is a coin flip from what I have seen too. Avoiding PMI was what I was thinking also by borrowing from the 401k. 5k from a 401k that would be paid back probably would not destroy retirement in around 30 years. I have read 401k loans are looked at by mortgage lenders and also they are not. Does any really know for sure? I have also seen installment loans that are within so many months are also not looked at. If a loan from a 401k was looked at by a mortgage lender then I would probably not touch it, unless the short term did not count. If a 401k loan would not be considered at all either way short term or long, then long term it is. 5.25% THANK YOU everyone for the advise or input, anything else on this would be great!
Re: Re: Use 401k 4 a down payment mortgage? Thank you lbrown for the bankrate.com article but my computer freezes up when I try it. Maybe my computer is retarded I don't know.
Re: Re: Use 401k 4 a down payment mortgage? Something else to consider - the money in your 401k is PRE-tax dollars. If you borrow from the account, you pay it back with POST-tax dollars, which means you pay double the taxes on the money, as it will be taxed again when you withdraw it at retirement (possibly at a higher rate). I asked my plan administrator the same question about a 1st time homebuyer's withdrawl, they said that only a certain type of IRA (Roth, I think) doesn't charge a penalty for a hardship withdrawl. I would be assessed a 10% penalty, they would withhold 10% off the top for taxes, and I wouldn't be able to contribute to the plan for 6 months following the withdrawl. I would strongly advise talking to your plan administrator, plans can be different and it's important to understand all the ramifications of your decision. Everyone's situation is different. Good luck with your new house whatever you decide!
Re: Re: Use 401k 4 a down payment mortgage? tc, All of the money that is deposited into a 401k weekly, bi-weekly or whatever is not taxed. On a 401k loan you receive the money tax-free, just like a normal loan, and then you put it back in over time with intrest. Taxes have little to do with it at that point. Unless of course someone was fired, then the balance of the loan would be owed along with all of the tax penalties and everything else. tc, thanx for giving me something to think about though. The more I learn, The more I need to learn and it won't stop! Hopefully I will catch up someday, ya right. This would not be considered a hardship withdraw. So the 10% wouldn't apply to this.
Re: Re: Re: Use 401k 4 a down payment mortgage? Again-I strongly encourage you to consult your plan administrator. I am in exactly the same situation and I am assured by Fidelity that this IS considered a hardship withdrawl. I don't know how much $$ you're talking about but 10% could be a nasty shock.
Re: Re: Re: Use 401k 4 a down payment mortgage? tc: OP is asking about a 401(k) LOAN, NOT a withdrawal. My 401(k) allows for either a residential purpose loan with term up to 30 yrs. or a "any other purpose" loan up to 5 yrs. in an amount up to 50% of balance. Of course, I TOTALLY agree one should consult with the plan administrator and thoroughly read the summary plan description before doing something. I once took out a loan on my 401(k), entirely tax-deferred balance, and I was NOT taxed on the payments back into my account. I know the world is full of opinions on this but IMHO the important thing is to be fully informed of the costs and benefits and make the decision based on your own situation, which noone should have a better grasp of than yourself. For example, if you had $10,000 in CC debt at 22% APR, would you continue to pay that ? Or would you consider paying it off with a 401(k) loan over 5 yrs. at 5.25% if you were quite confident of job security and were convinced that the 401(k) investments were in no way going to exceed a (22 - 5.25 = ) 16.75% return over the next 5 years ? Yeah, I know, the opinions will vary all over the place on this. So, make up your own mind !
