401(K) for down payment
401(K) for down payment - Many home buyers today are using funds from their employers 401(K) account to provide the down payment obligations on a house. Normally, you cant withdraw money from your 401(K) plan unless you become disables, leave the company, or retire, but many company plans permit certain "hardship withdrawals" in cases where there may be a need to resolve a heavy financial situation, such as the purchase of a principal residence.

It is important to beware of the caveats of hardship withdrawals. There are taxes and penalties involved on the amount withdrawn from your plan. A better way would be to borrow against your 401(K). The interest you pay on the loan goes back into your account, and the money you receive is not taxable as long as its paid back.

A loan from your 401k account is usually at a very good interest rate. This rate will be better than the rate you could get on the second mortgage if you were to try to finance your home purchase with an 80% first mortgage and a 20% second mortgage.

With the large amounts of 100% financing programs available today you should think twice before tapping into your retirement funds. The money you withdraw from your 401K will cost more over the long run then it may be worth in terms of payment reduction. Always consult a financial planner before making this important decision that can affect your financial future.

One thing people don’t consider when taking a loan against their 401(k) is the "opportunity cost". If it takes you a couple years to repay the funds that time that you are missing out on the opportunity for growth in those investments, this could easily be 10% or more.

Not only should you speak to a mortgage professional, but also a retirement specialist as well. He or she should be able to tell you if pulling money out of your 401k is the best decision for you or not. It's always best to look at something long term rather than short term. This is why talking to a professional would be best.

One thing to remember if you are going to take a loan out on your 401k to use for a down payment and/or closing costs is that you will need to document the terms of the loan. Your lender will need to know how much the loan is for, how long the repayment period is and what the monthly payments will be on the loan. This loan will go against your DTI (Debt to Income Ratio). Therefore, have your mortgage broker make sure that you will still qualify for the mortgage loan with this figured into your debt ratio before actually taking the loan out.

401K for downpayment - Many home buyers today opt to use funds from their employer’s 401(K) program to come up with the down payment on a house. Ordinarily, you cant take money from your 401(K) plan unless you retire, leave the company or become disabled, but many company plans permit certain “hardship withdrawals” when there is an immediate and heavy financial need, including the purchase of the employees principal residence.

The drawback to 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 year of withdrawal. And while hardship withdrawals are allowed by law, your employer is not required to provide them in your plan. Check with your employer’s human resources department if youre not sure if your 401(K) plan allows hardship withdrawal.

Another approach may be to borrow against your 401(K) – often as much as 50 percent of your account balance. You pay interest on the loan, but the interest goes back into your account. The money you receive is not taxable as long it is paid back and plans can give you anywhere from five to 30 years to pay back your loan.

There are risks involved in borrowing from your 401(K). If you lose your job or leave your employer, you must pay back the loan in full within a short period, sometimes as little as 60 days. If the money is not paid back in that time, it is considered a withdrawal from your plan and subjected to the same taxes and penalties. And while 401(K) accounts can usually be rolled over into a new employer’s 401K without penalties, loans from a 401K cannot be rolled over.

In addition, because the funds withdrawn from your account are no longer earning compound interest, your account will be smaller when you retire. And you’ll be replacing pretax money with after-tax money.

Some lenders will count the money you borrowed from your 401(K) as an additional debt that will go along with your car payments, student loans and credit cards. While it may seem unfair since you are borrowing your own money, most lenders view it as a payment obligation that affects your debt-to-income ratio in qualifying for a home loan. It may be a factor in whether you decide to make a hardship withdrawal from your 401(K) and pay tax penalties or borrow against it.

When you borrow money against the 401K, the monthly payment to pay off 401K needs to be included when the lender is calculating your debt to income ratio. Consult your mortgage officer to see if this would still qualify the borrower for the loan.

Rather than actually borrowing money against your retirement account, you can also use the account as an asset. Having high balance assets makes it easier for a lender to see your credit worthiness in lieu the required down payment.

If down payment is a problem and you don't want to borrow against your 401(k) then consider 100% financing
which requires little or no money down.

Down Payment from 401K or 403B Retirement Annuity - If you are purchasing a home and have a substantial portion of your assets inside of a retirement account such as a 401K, 403B or other retirement product or annuity, you may choose the increasingly popular option of tapping those funds to make a down payment on your new home. Like any other accounts you may have in your name, such as brokerage accounts and bank checking, savings and money market accounts, most popular retirement accounts qualify as assets to be counted toward your “reserves”, a measure used by mortgage lenders to determine how many months of payments you must have in order to serve as a buffer covering payments you might miss if there were any interruption of your income.

It is important to speak with your human resources department as well as your tax professional to determine whether borrowing against your retirement account or taking a straight withdrawal is the best option for you. Be sure to review all possible avenues to access your money.

Retirement accounts such as 401(k) or 403(b) annuity accounts are generally administered or sponsored in whole or in part by your employer. In addition to serving as excellent documentation of your earnings and savings, your 401K or 403B accounts can be used in a variety of ways to help finance your new home purchase. Depending on the specific restrictions applied to your account, you may have the option of withdrawing money directly from the account or “borrowing” money in the form of a loan (against your own funds) which is repaid at a generally low rate of interest. Regardless of whether you cash money out of your account or take a loan against it, be sure to thoroughly document any details of the transaction, including any withdrawal or loan application paperwork, demand drafts, cashier’s checks, deposit tickets, etc. for the purpose of substantiating this source of funds to your lender.

Lenders do treat down payment money from retirement accounts differently from program to program and state to state, sometimes from case to case. In particular, borrowing money in the form of a loan may increase what the lender perceives as your monthly debt obligations, because even though you are borrowing money from your own account, you are still obligated to make a payment every month which you wouldn’t have to make otherwise, and lenders will often consider this to be detrimental to your qualifying DTI or Debt to Income Ratio, making it harder to borrow as much money as you may need. On the other hand, cashing out any type of retirement account will almost always create a taxable event and sometimes also a penalty fee, which generally accounts to more than the nominal interest rate common to the loan option. Speak with your loan officer about the requirements of your individual program and weight the options with him/her or another trusted financial professional.

You may also consider speaking to your employer about any down payment assistance programs which may be available to you as part of your benefits package. These can come in many forms, but it is important to clarify with your employer that any down payment assistance granted does not amount to a loan and that there is no expectation of payment. Why would an employer want to help you make a down payment? Call them old fashioned, but most companies do want their employees to stick with them, and if your employer helped you achieve ownership of your dream home, how would you feel about them?

As with the 401K, 403B or other retirement account options, down payment assistance from your employer should be documented in detail and all copies of communication, checks, deposit tickets and statements of account, along with signed records stipulating that the funds are given freely and not to be repaid, should be kept for submission to your lender.

If you intend to withdraw funds from these types of accounts to use towards your down payment, be sure to let your mortgage consultant know in advance, as these transactions can take a considerable amount of time to be processed.

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