Your W2, 401K , & The Mort

Discussion in 'Credit Talk' started by M Tirso, Jun 4, 2000.

  1. M Tirso

    M Tirso Guest

    As a general rule, with minimal outstanding debts, a person can afford a mortgage roughly 2 1/2 to 3 times their gross income; this is according to many consumer education materials I have read as I plan my purchase of a home.

    I'm a 20-something with income is in the mid 20's but I may enroll in my company's 401k program which will reduce the gross income amount shown on my 'W2' to the low 20s. At some point in the lending process the lender will want my W2's from the last two consecutive years to determine how much money I am eligible to borrow for the purchase of a home.

    Thus by the conventional calculus, enrolling in 401k will reduce the amount of money I am eligible to borrow. Also, 401k deductions will lower the amount of money I am currently able to dedicate towards a saving a down payment and the reduction of current debts as I prepare to purchase a home.

    So I need help making up my mind since open enrollment for the 401k program is on July 1. Should I wait until I buy a home before I enroll in a 401k program?
  2. lisa

    lisa Guest

    RE: Your W2, 401K , & The

    I'm pretty sure that this will not make your gross income appear as less, just your taxable income.
  3. JP

    JP Guest

    RE: Your W2, 401K , & The

    Don't confuse yourself. Most lenders are looking at your gross income before any deductions including taxes, insurance, 401K etc.

    By enrolling in your 401K you are investing in your retirement. Without knowing your specific details it is tough to really answer the 401K question, but I will tell you this, if your employer is matching your contributions, you should at least contribute up to the amount that they will match (i.e. if they match 100% up to 6% of your salary, you should contribute at least 6% of your salary to take advantage of the match).

    I realize you want a piece of the American dream, but with a salary in the 20's, depending upon where you live, it may be tough to find real estate.

  4. miles

    miles Well-Known Member

    RE: Your W2, 401K , & The

    I am participating in my company's 401k program. When I receive my w-2 form, my total taxable income is minus the amount I contributed to the plan. Maybe you should take the last paystub of the year when going through the mortgage process as proof of your gross income. Your paystub will include the amount you earned before contributing to the plan. I think you should participate in your 401k. It is extremely important to save for your future. If you don't enroll now, you will have to wait until next year. Since your company matches a certain amount, you will be in essence throwing money away. Hope this helps. Good luck!
  5. M Tirso

    M Tirso Guest

    solid and informed advice

    Thanks Miles!

    Yes you do help me with your solid advice based on fact and actual experience. Under my employer's program which is managed by Cigna, I can contribute up to 15% of my income to the plan. Unfortunately, my employer matches only 25% of my contribution. A friend of mine who works as a retail manager at a national chain of copy centers is permitted up to 8% and the company matches 100% of his contribution. It appears that there is a wide range of programs among companies, some more lucrative than others. I have a modest position in a large company with a billion dollars in revenue last year and hopefully our 401K program will become more competitive. In any case, even with modest contributions I will be able to save enough money to retire comfortably if without luxury. As far as housing goes, I am looking to purchase in the high 60s range, preferbly an older fixer-upper. A one bedroom Victorian-era house with wood floors, a fire place and all the standard charm is selling right now for 59k in an area neighborhood. It would be ideal for me but unfortunately I haven't the money yet saved for the conventional 20% down payment. So I will begin to save in earnest ($1000 a month) until I reach my down payment goal. Thanks again Miles for your positive input.
  6. miles

    miles Well-Known Member

    RE: solid and informed advice

    You're very welcome!
  7. Don

    Don Well-Known Member

    RE: Your W2, 401K , & The

    Your GROSS income is what is there BEFORE any 401K or other deductions are made. That will not change. The bank will not penalize you for investing in a 401K. And that is what they look at.

    Actually, the bank likes to see a 401K for a couple reasons:

    1. You can't juts go grab that money and spend it needlessly. One of the few reasons you can tap into a 401K before retirement is due to mortgage foreclosure. If you're a nervous lender, that's a good thing.

    2. Also, because it is "safe" money, I had one mortgage where the lender considered it my 2 months cushion that is typically required at time of closing, and had no problem with it. At the time, I was throwing 10-12% at the 401K every paycheck.

    We just recently got another construction loan; in the process, the bank looked at our 401K as an asset (not income, but an asset), so essentially, total gross income, of course, was counted, along with the profit generated by the 401K plan.

    Keep saving!...your biggest challenge will be trying to put money in both places, and achieve both goals...sounds like for now, you should work towards liquid cash, and once you get the house, go heavy on the 401K savings...

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