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401k for Downpayment 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The drawback to a hardship withdrawal is that you will pay taxes and penalties on the amount withdrawn from your plan, which often must be paid in the year of withdrawal.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 you're 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In addition, because the funds withdrawn from your account are no longer earning compound interest, your account will be smaller when you retire.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. 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. 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. 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. 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. 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. 401k as a downpayment - How can I use my 401k as a downpayment?
There are several ways that you can use your 401k to assist you in the purchase of a home. You can withdraw funds from account to use as cash down (although there are typically significant tax implications), take a loan against your 401k for the down payment, or leave money in the account and use it in lieu of cash reserves. For first time home-buyers, many times you can avoid be penalized for withdrawing your 401k money to use as a down payment on your first home. You will still have to pay taxes on this money, but you may be able to avoid the penalty fee for early withdraw. You need more information please contact David J Zwierecki at either GoPurchase or at 888-418-4467. If you are concerned about withdrawing savings from your 401(k) you should consider 100% financing. The rate and terms may appear less attractive but you must also factor in the cost of penalties for early withdrawal of your 401(k).
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Information listed above is to be used for educational purposes only and is not guaranteed
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