Regular Contributor
ccubedzx3
Posts: 171
Registered: ‎04-30-2012
Can savings come from 401k? or must be from "savings" account?
[ Edited ]

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!


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tooleman694
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Registered: ‎08-25-2011
Re: Can savings come from 401k? or must be from "savings" account?

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

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Whygohome
Posts: 15
Registered: ‎12-28-2010
Re: Can savings come from 401k? or must be from "savings" account?

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.

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MovingForward_2012
Posts: 3,406
Registered: ‎12-19-2012
Re: Can savings come from 401k? or must be from "savings" account?
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.
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ccubedzx3
Posts: 171
Registered: ‎04-30-2012
Re: Can savings come from 401k? or must be from "savings" account?

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!


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MovingForward_2012
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Re: Can savings come from 401k? or must be from "savings" account?
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.
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tshope4205
Posts: 39
Registered: ‎11-09-2012
Re: Can savings come from 401k? or must be from "savings" account?

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.


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beb86
Posts: 1,115
Registered: ‎10-31-2011
Re: Can savings come from 401k? or must be from "savings" account?

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.

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Regular Contributor
ccubedzx3
Posts: 171
Registered: ‎04-30-2012
Re: Can savings come from 401k? or must be from "savings" account?
[ Edited ]

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!

 

 


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MovingForward_2012
Posts: 3,406
Registered: ‎12-19-2012
Re: Can savings come from 401k? or must be from "savings" account?
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!
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