topic Re: Can savings come from 401k? or must be from "savings" account? in Mortgage Loans

Can savings come from 401k? or must be from "savings" account?

ccubedzx3 — Wed, 16 Jan 2013 15:32:20 GMT

We are currently building a new home and were told that we would close in April. I plan on taking a loan from my 401k to cover costs right about when we close. Is it ok to do this? Another scenario is to take a loan out now from my 401k, and throw it in my savings account until we need it. Which is the best option?

Thanks!

Re: Can savings come from 401k? or must be from "savings" account?

tooleman694 — Wed, 16 Jan 2013 15:37:10 GMT

If it were me, instead of taking a loan I would just make a withdrawl.

Re: Can savings come from 401k? or must be from "savings" account?

Whygohome — Wed, 16 Jan 2013 16:02:32 GMT

You need to know from your lender how long the funds need to be "seasoned" in other words how long they need to be sitting in that savings account so that their source is not in question. As for a 401k loan some lenders will consider that loan as part of your debt for your DTI and some will not. Our lender didn't care that our funds came from a 401k loan but needed them seasoned for two months. I also would recommend a loan over a withdrawal as you are taxed when you withdraw the funds even when buying a primary residence.

Re: Can savings come from 401k? or must be from "savings" account?

MovingForward_2012 — Wed, 16 Jan 2013 16:22:51 GMT

No! Don't make a withdrawal from your 401K! You will be heavily taxed for it!

You can take a loan from your 401K for a downpayment or savings. I am taking a loan from my 401K for savings, moving costs, and new furniture.

What you need to do is take out a residential loan NOT a general loan. A residential loan MUST be taken out before the closing date on your contract. A general loan has to be paid back in 5 years whereas as residential loan can be paid back over 20 years. To take out a residential loan on your 401K, you will need your Purchase and Sales Agreement, also known as your Contract and your signed promissory note.

You will need to request a residential loan through your online account or over the phone. They will send you a promissory note in the mail and when you get it, sign and date it then return it back to them with a copy of your signed Purchase and Sales Agreement. They will send your money out after approval which typically takes 5 business days.

You can take out up to 50% of its value. I got 3.25% interest on a 20 year loan that is only costing me $7 a week from my paycheck. There is no penalty for paying back early so I would take out a 20 year loan and pay it back in 10 years with additional funds after you get established in your new home. I plan to pay it back over 5-10 years. For the first 5 years, I am paying the minimum amount and then around the 5 year mark, my mortgage insurance will drop off the mortgage payment and I will be paying $346 per month less on the mortgage and I plan to use the $346 in savings to pay off my loan on my 401K faster. Your mortgage insurance should be removed when your loan balance is 78% of the original appraised value...that typically occurs after making your mortgage payment for 5 years.

Withdrawing from your 401K is horrible as the IRS will tax the amount you get by 40% and if you spend the amount that will be taxed, you will potentially owe the IRS a lot of money next year when you file. Plus when you withdraw, you get less money than if you took out a loan. Additionally, you lose out on capital gains on the withdrawn amount as it isn't going back in. As you pay your loan back, you earn capital gains on the money replenished on top of the money you have already been contributing through paycheck deductions.

Re: Can savings come from 401k? or must be from "savings" account?

ccubedzx3 — Wed, 16 Jan 2013 20:58:43 GMT

I plan on taking a loan out either way. My main question is, will the mortgage company look at my 401k loan as "savings" or will treat it like something else? I am paying off items like a banshee right now, so I don't have much in my "savings account." I want to know if I should contribute more to savings right now to build up funds in addition to what I plan on using from my 401k?

Thanks for the advice in advance!

Re: Can savings come from 401k? or must be from "savings" account?

MovingForward_2012 — Thu, 17 Jan 2013 02:19:21 GMT

I hardly have jack now in my savings and I am waiting on my 401K check to come because after the new car and earnest money it is low but with more on the way! I get a $6,000 bonus in March every year and I am taking a $5,000 loan out on my 401K and I will be back to being comfortable again. I have run across no issues with what you are speaking about and I am about 2 weeks from closing. I know for new constructions, if you don't have the full deposit upfront, you have to show the bank how you are going to pay the remainder and they will review your deposits to make sure your payment plan is doable but if you are paying everything upfront in full when needed, like I am then I don't see any issues. I should mention that my downpayment is being rolled into a second mortgage and that may be the difference but if you are using part of your 401K for the downpayment if they ask about where is your savings for the down, just tell them it is coming from your 401K. They will ask for your latest 401K statement and can verify sufficient money is there for the down payment. Your 401K will be looked at as reserves if for savings and a downpayment if for that. The remaining balance in your 401K is looked at as reserves. Not sure if I answered your question or not.

Re: Can savings come from 401k? or must be from "savings" account?

tshope4205 — Thu, 17 Jan 2013 02:24:32 GMT

I am in process of closing now - but my lender was fine with downpayment and/or closing costs being covered by my 401k - however they also required 3 months reserves in addition & that could not come from my 401k. Pretty sure that might vary by lender though.

Re: Can savings come from 401k? or must be from "savings" account?

beb86 — Thu, 17 Jan 2013 05:42:26 GMT

You can take a loan from your 401k tax and penalty free for down payment/ closing for a mortgage... But it is important that you pay it back or you will be penalized. The loan wont count against your DTI since it is a loan against yourself.

Re: Can savings come from 401k? or must be from "savings" account?

ccubedzx3 — Thu, 17 Jan 2013 12:07:22 GMT

I've already gave the builder a check for $10,000 (3.5% down going FHA) in Earnest money back in September. $500 towards the title work, and $9500 towards the down payment which has already been cashed and cleared.

My lender told me they may be able to offer a "lender credit" up to $7000 depending on the rates when I lock in (late March). My closing costs are going to be about $8000 total, so I'm hoping that I won't have to come up with too much cash for closing, and I can save the cash for other things such as landscaping and what not. I just don't want to depend on the "lender credit" just in case it isn't available. I want to make sure I have enough cash to close if need be. I just don't have the means to save $8000 between now and closing...maybe half that, but not $8000 unless I tap into my 401k.

Thanks for your responses all....very valuable information and I greatly appreciate the time you took out to respond!

Re: Can savings come from 401k? or must be from "savings" account?

MovingForward_2012 — Thu, 17 Jan 2013 15:00:53 GMT

I should have told you also to not wait until right before closing to take a loan on your 401K if you plan to take out a residential loan that comes with longer terms than a general loan. The reason I say this is because it takes twice as long (approx. 2 weeks) to process as they have to review your purchase and sales agreement to make sure it has everything it should. If your contract doesn't have an estimated time of closing, look through your other loan docs to find it. I found mines on my "Cash-to-Close" Summary. Make sure you fax in an estimated date of closing that is AFTER the date you requested the loan or you may be asked to provide it later before processing which can delay your loan. Fax in your GFE as well. To be on the safe side, I would call and request to speak to an investor and ask what specific things they need to approve your loan. Also be sure your contract has all of the required initials and signatures.

One thing I found out yesterday is that if you want to repay it back early, it has to be paid in full, no partial payments allowed. So when my mortgage ins is removed from my monthly payment at the 5 yr mark, I plan to load that extra money in savings until I have the full amount needed to pay back the loan. Good Luck to you!

Re: Can savings come from 401k? or must be from "savings" account?

MovingForward_2012 — Thu, 17 Jan 2013 15:10:10 GMT

I just saw your last post. My closing costs are also $8000. Our home is a new spec build that is finished and ready to go.

We received a lender credit that covered all of our closing costs minus $400. As well as a $5,000 lender credit towards the purchase price. To get these credits we had to go through the builder's lender. Are you going through the builder's lender?

Re: Can savings come from 401k? or must be from "savings" account?

ccubedzx3 — Thu, 17 Jan 2013 16:43:25 GMT

Moving-Thanks for all your input! I appreciate it. So from what I understand, you only had to show up at closing with $400?!?!?! Wow...what a dream that would be!

I'm hoping for a similar result. We are still about 90 days out from closing (just about to do insulation, before the drywall) so I still have time to get my ducks in a row with the 401k loan.

If I have $20k in my 401k, and my wife has the same amount in herrs, will they treat it as such that we have near $40k in "savings or reserves?"

I just don't want to have a headache because the money isn't technically liquid...

Re: Can savings come from 401k? or must be from "savings" account?

MovingForward_2012 — Thu, 17 Jan 2013 18:39:43 GMT

We haven't closed yet so the $400 is an estimate. We are about two weeks from closing.

You can take out up to 50% of your 401K as a loan so in your case, $10,000. I haven't run across any requirement for a particular amount of reserves at closing through my lender but I plan to call my LO today to double check.

Re: Can savings come from 401k? or must be from "savings" account?

ccubedzx3 — Fri, 18 Jan 2013 13:13:21 GMT

Is your house completed? Did your builder give you a date as to when you need to close by?

My lender told me to get back to them when we are about 45 days from completion to lock in a rate. Even once the house is completed, isn't there another period of time where you do a walk through and inspect for any damages, or anything that may need to be fixed before you actually move in?

I'm just curious to the timeline of events that takes place once the house is complete according to the builder. My lender said they won't appraise it until the house is completed.

Re: Can savings come from 401k? or must be from "savings" account?

MovingForward_2012 — Fri, 18 Jan 2013 16:58:23 GMT

Yes our house is fully complete except for the landscaping that the builder will finish in the Spring. We have had the code to the door since we signed the contract on 1/5 and can visit when we like. We have come over several times to plan out where items will go and what additional furniture is needed to purchase after closing. We also made a list of things that need to be fixed and also will have an inspector go through and make sure all the new appliances are installed right and working correctly. Yes, you want to make a list of everything that needs additional work as once you close, those minor details are your responsibility. The new house came with brand new appliances! A stainless steel fridge, microwave, stove, oven, and dishwasher plus a washer and dryer

I talked with my LO yesterday about required reserves to close and he said it is typically based on credit score and since my score is a 703, they will not require that I show a certain amount of reserves. Every lender is different and I am going through UAMC and then after closing, the loan will be sold to our local housing authority and they will service it over the life of the loan.

We need to close by 1/31...end of this month. I put an offer in and earnest money down on 1/2, signed contract on 1/5, and receive loan commitment letter and conditional approval on 1/17. First preapproval was on 12/31, switched to builder's lender and got second preapproval on 1/5. I had to switch lenders to get $8000 in closing costs and prepaids paid by builder and $5000 off the purchase price of the home. Our estimated cash to close is $400 and $12,000 in downpayment is being rolled into a second mortgage. The appraisal is due back Mon or Tues. so your correct that it won't appraise until the house is completed.

Re: Can savings come from 401k? or must be from "savings" account?

chriscarter — Tue, 29 Jan 2013 02:12:30 GMT

I would take the loan, but be sure to pay it back before the serious penalty cutoff. Early withdrawal will cost 10% plus ordinary income tax rate. The seasoning may not be an issue with a letter of explanation and original withdrawal/deposit slips. It's your money in both places, you will just have to fully document the transfer. Show how the money got into your 401K, then how it went from there to your checking/savings.

Re: Can savings come from 401k? or must be from "savings" account?

daninicole — Tue, 29 Jan 2013 02:42:23 GMT

Tshope4205 this is not truly concerning your question (sorry) but I see that your scores went up tremendously in a short amount of time. I really would like to know how you did it. I am now where you started from and I would lIke to get where you are (and are headed to). I have my townhouse up for sale and hubby and I plan to buy our dream home in a year or so but we both need to make some major credit improvements. if there is a forum where you may have explained this, please let me know and I will head over that way. Good luck with closing!! Thanks!

Re: Can savings come from 401k? or must be from "savings" account?

JM-AM — Tue, 29 Jan 2013 03:08:27 GMT

daninicole wrote:
Tshope4205 this is not truly concerning your question (sorry) but I see that your scores went up tremendously in a short amount of time. I really would like to know how you did it. I am now where you started from and I would lIke to get where you are (and are headed to). I have my townhouse up for sale and hubby and I plan to buy our dream home in a year or so but we both need to make some major credit improvements. if there is a forum where you may have explained this, please let me know and I will head over that way. Good luck with closing!! Thanks!

Sometimes Daninicole its just about the timing.

Many different things can impact your scores. Some things fall off over time which improves your score. Some things have to be worked on.

Every one has a different situation. Best thing for you to do is go to the rebuilding board and ask questions, and do some searching and reading. You will learn plenty and know how to start improving your scores.

Re: Can savings come from 401k? or must be from "savings" account?

tshope4205 — Tue, 29 Jan 2013 03:51:39 GMT

Hi Daninicole - just saw this - previous poster is right, it really does depend on the situation - and the rebuilding credit & credit card boards were tremendously hepful! As for my situation, I had a few small collections that I paid & got deleted, you should be able to find a lot of information on that situation on the boards if that applies to you. I then also paid down my credit cards from about 80% utilization to about 10% utilization. It took a bit of cash, but it was totally worth it - as it jumped my score up so quickly.

Hope this helps!

Re: Can savings come from 401k? or must be from "savings" account?

jbraeking — Tue, 29 Jan 2013 04:12:28 GMT

You may be able to take a no penalty withdrawal on 401k for a primary residence. A financial advisor is needed to avoid a mistake costing thousands. Good luck!