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Hi Ross - we took money out for our house, too. Our LO recommended we do this back in May when we first started waiting on a short sale. We ended up waiting until mid July before we took the money out. We didn't want to waste that money and not roll it into a house, you know? So that's why we hesitated.
Anyway, regardless of that, I asked LO why she wanted the money out so early and she said "Because we don't want to open up another can of worms." She was referring to having to prove to the UW where the money came from. It ended up not mattering either way - we just showed the statement from John Hancock w/ the withdrawal and Verification of Deposits to our bank. easy - no problem.
Any large deposits on the bank statements the lender reviews will need to be sourced, so if there is a deposit from your 401k then it'll need to be sourced to the 401k loan/withdraw. Loans & withdraws from your 401k are perfectly fine for mortgage financing - all it does it reduce the amount of "reserves" that your 401k gives you to qualify with. I'd definitely recommend you discuss this with your loan officer before you do it.
Is there some sort of rule that says the money taken out of the 401k has to be used for a home purchase within X amount of time of the withdrawal, or possibly that the home has to be purchased within the same year as the withdrawal. I don't know the answer to this, but I'd be looking for the answer, especially if there is a risk that the home isn't completed until 2012.