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Regular Contributor
StrateUp
Posts: 233
Registered: ‎02-02-2012
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Borrowing down payment and closing costs from my 401K

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I am thinking about borrowing the down payment and closing cost from my 401K for an FHA loan. My employer deducts installments from my paycheck at prime +1% for 5 years to pay myself back for the loan. IS THE MONEY I PAYBACK THE LOAN WITH PRE OR POST TAX? If it is pre-tax then I'd be paying myself back at about 1.84% interest. If the payback money is post tax then it would be the same as approximately a %20 interest loan because I would be paying the government about 20% taxes before paying back my loan.

IF the money I borrow from my 401K gets paid back pre-tax then I would want to put 20% to 35% down on the house. If the money I borrow from my 401K is paid back post tax, I would want to borrow as absolutely little as possible even to the point of rolling as much of the closing into the loan as allowed.

My employer can't seem to tell me whether the loan is paid back pre tax or post tax and nobody else at my job seems to know either.

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anh2lua
Posts: 64
Registered: ‎06-22-2011
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Re: Borrowing down payment and closing costs from my 401K

it's "POST" tax for sure.

still, you are paying interest to yourself.

 

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Regular Contributor
StrateUp
Posts: 233
Registered: ‎02-02-2012
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Re: Borrowing down payment and closing costs from my 401K

Can't see where it would do me any good to pay myself 1.84% interest when I'm paying Uncle Sam 20% interest at the same time. Looks like a minimal down payment for sure.

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webhopper
Posts: 7,225
Registered: ‎09-16-2011
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Re: Borrowing down payment and closing costs from my 401K

Even if you had the money sitting in a savings account, it would still be post tax money so I don't see the point of making a big deal of it. If you have money sitting in a Roth IRA you can withdraw it for the purchase of a principle residence as long as it's been there for 5 yrs. Some 401k plans allow you to do this too without the added penalty, but you will be 1099 on early withdrawals I believe... Best place for you to ask would be a tax advisor. Have you considered that the itemized deductions of your mortgage interest and PMI might decrease your effective tax rate? It's probable that your tax rate will decrease after buying the house. I'm typically taxed at 6% due to all of my itemized deductions from my primary house interest as well as my rental property interest and taxes on both.

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Regular Contributor
StrateUp
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Registered: ‎02-02-2012
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Re: Borrowing down payment and closing costs from my 401K

I had only hoped that since my 401K contirutions were original pre tax contributions, and that I'm paying these same funds back to myself would be pre-tax contributions. It's not a huge deal but would I rather pay 0% or 20% if I had a chose? Anyway, I'm only borrowing 4 to 6K. I am not borrow anything.

I still don't know if this house will be expensive enough for me to find enough deductions to itemize. That ramains to be seen. Though near new construction and in a gated community, this is still the new Las Vegas market; a $52,000 townhouse.

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webhopper
Posts: 7,225
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Re: Borrowing down payment and closing costs from my 401K

Ah I see, well you are getting a heck of a deal :smileyhappy: I borrowed 7k from my 401k out of the 12k I put down. I'm not great on saving money in a traditional savings account, so basically the 401k was the place I had to go for cash. The house I was living in and renting became gross due to sewage leak on the property, so I ended my lease early and was homeless for 3 months while waiting to close! It's funny how cheap it is to live and how much money you can save when you are homeless! Lol I was staying in a 5th wheel on my dads sofa sleeper in the fifth wheel and ended up being able to pay credit cards down to 11% util which took 3k and save an extra 5k, all in the span of 3 months. It was insane but I love the house :smileyhappy: being homeless made me realize how blessed I am to be able to buy a place like this!

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Regular Contributor
StrateUp
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Registered: ‎02-02-2012
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Re: Borrowing down payment and closing costs from my 401K

I've had an internet yard sale going since I made an offer on the house. I had no idea how much "good" junk I had laying around here. I've raised about 4K for down and closing but ended up paying down credit cards for utl. Actually, I've never been in better shape to buy a new house. There won't be much suffering at all after buying this house.....until RC Willey furnitures Memorial Day sale anyway. :smileysurprised:

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MBOhio2
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Registered: ‎02-07-2011
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Re: Borrowing down payment and closing costs from my 401K

StrateUp - I've heard of people having issues verifying the deposits that were from cash sales on Craiglist, so be careful about that. You may want to make sure you have copies of your Craigslist postings or just make sure that when you apply, all of the cash deposits from the Craigslist sales aren't on your last 2 bank statements. I'm sure others can explain better, but I just wanted to throw that out there!

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anh2lua
Posts: 64
Registered: ‎06-22-2011
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Re: Borrowing down payment and closing costs from my 401K


MBOhio2 wrote:

StrateUp - I've heard of people having issues verifying the deposits that were from cash sales on Craiglist, so be careful about that. You may want to make sure you have copies of your Craigslist postings or just make sure that when you apply, all of the cash deposits from the Craigslist sales aren't on your last 2 bank statements. I'm sure others can explain better, but I just wanted to throw that out there!


you can easily ask a relative to sign a "gift" letter, just a paper process for the UW.

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Regular Contributor
StrateUp
Posts: 233
Registered: ‎02-02-2012
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Re: Borrowing down payment and closing costs from my 401K

MBOhio2, none of the money I raised is going towards the house. I ended up paying off a few balances of credit cards instead. Still though, I have documented every less-than-usual deposit just the same. My numbers are good. I talked face-to-face with Wells Fargo today. She said she didn't care about my internet yard sale. The other numbers would suffice. Not a boast; you wouldn't believe where I came from to get here.


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