That money is set aside for closing and they don't want you to use it because it may appear you will not have enough funds to close. If you don't have enough to close then your file will get kicked back to underwriting until you can get a statement showing you do have the required funds. It's just less of a headache if you just don't touch it.

Acutally I didn't touch it, they just informed me that that money can't be used towards closing, thus giving me no funds left for closing. 

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Asus wrote:

Acutally I didn't touch it, they just informed me that that money can't be used towards closing, thus giving me no funds left for closing. 

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Hi Asus. Welcome to the forums. I had a similar experience to yours. The underwriter told us that new deposits to accounts that were to be used for Closing costs had to "age" for at least two months in order to be used for closing costs. Perhaps a letter of explanation to the underwriter or your broker would help. A simple explanation of the source of these funds would suffice? Maybe some other forum members will chime in with better advice. Hope this helps. Good luck, and don't give up. Veracious

I apologize because I misunderstood your initial post. I don't see why you can't use your 401k money towards closing cost. I did this and I used a statement from my 401k showing it leaving my account and then showed the bank account getting the exact amount deposited. Talk to your LO and see how they can help.

You can use money from 401k for down payment or closing even though if you borrow from its a "loan" but not in the sense as your taking on new debt since its already your money. We had a situation where my wife was unemployed before closing and I put a few thousand dollars cash in the bank to cover expenses and when it came to closing the funds were unverifiable so even though I had plenty of money in my account I only made it to closing by about $20 bucks but you should be fine just don't touch your account and NEVER DEPOSIT CASH. Hope this helps

just to add a question here, if you are going to get a loan from your 401K to use for dp and closing costs, it would be best to deposit it a couple of months in advance for it to age?

It's not required to let it age. You would just have to show a paper trail, meaning showing it leaving your 401k and going into your bank account.

thx!