401k and pre-qualification

Anonymous · ‎04-08-2015

We've been working on getting pre-qualified since February. We have a list from a potential LO and it was pay down the credit cards (done), pay off the judgments (done, but waiting on satisfaction paperwork from another state), pay off remaining non-medical collection and make sure nothing shows as disputed any more.

The remaining non-medical collections total roughly $3500 and we simply don't have it right now. We'll be using a VA loan, so we don't have a downpayment to pull from either. The only option we have is the 401k that we could draw a loan on. We have over $11k vested, but I'm worried that since we show this as our only reserves, using it to pay this off would do more harm than the good of paying those off right now. And that it would swing the debt to income ratio too high. I'm not sure how to calculate that. This LO didn't pull my credit into the equation like another did, so we're not sure what if my income/debt/etc factors into any of this.

We're very quickly running out of time to figure this out as our lease is up in July so any advice regarding rather or not to use a 401k loan in this instance would be appreciated. Thanks!

Anonymous · ‎04-09-2015

My advice is renew the lease, and take the pressure off. If for some reason they want y'all out, find another rental. Your scores, and file are not ready for the scrutiny a mortgage will bring, too many loose ends.

With the pressure off, you can concentrate on the problems in your file while at same time your scores climb. Do you currently have a solid rent verification? If not, work on it.

with file rehabbed to best it can get, mid to high 600s score, 2 years of excellent rent pay that is well documented, you walk in the office with confidence. All that will take about 9 months to year.

This forum is full threads where guys pulled the trigger a little early and had all kinds of problems.

Thats just what I'd do.

Anonymous · ‎04-09-2015

@Anonymous wrote:
My advice is renew the lease, and take the pressure off. If for some reason they want y'all out, find another rental. Your scores, and file are not ready for the scrutiny a mortgage will bring, too many loose ends.

With the pressure off, you can concentrate on the problems in your file while at same time your scores climb. Do you currently have a solid rent verification? If not, work on it.
with file rehabbed to best it can get, mid to high 600s score, 2 years of excellent rent pay that is well documented, you walk in the office with confidence. All that will take about 9 months to year.

This forum is full threads where guys pulled the trigger a little early and had all kinds of problems.

Thats just what I'd do.

I would have to agree with BamaGuy. I had all of the above when I first spoke with a mortgage broker who put it to me point blank. Don't get in a hurry. Do your credit file clean up before you pull the trigger. Less headaches and she was soo right. Although I'm stressing myself to no end anyway, that't just me. Homebuying can be very stressful without having all the credit issues on your reports as it is. Add into the mix several different types of credit derogs and your asking for some major headaches and nausea going through underwriting.

Anonymous · ‎04-09-2015

In general, drawing against a 401k is a really bad idea. You're mortgaging your future when you do it, because you lose the compounding interest effect. I would renew the lease.

Anonymous · ‎04-10-2015

If renewing the lease were an option, I'd be all over it. But it's not. We have two years of excellent rent history here, but we now exceed the max occupancy clause so they will not allow us to renew. When the lease is up we will have been here 2 full years and we have a excellent letter of recommendation/reference from our landlord before this even though we were only there 10 months.

DH's job is presuring us to move closer, it's part of his job description that he needs to be available on a moment's notice and we currently live 45+ minutes out depending on traffic because this was all we could find on 3 weeks notice when he transferred to this office. Rentals available to our family size in that area run $1800+/m. That's double what we currently pay.

I'm working my rear off to come up with the cash to PFD these, but DH is still lobbying for pulling the minimum needed out of the 401k, settling them and then putting the hustle into paying off that loan.

I know on the larger level of interest, etc that it's a bad idea. But I guess what I'm asking is if we pull out $2500 on a loan, but still have $9k+ available as reserves on a hardship pull, is that hurting us on the mortgage app any more or less than the collections? It's likely we'd have the loan paid off before closing anyway. But DH's throught process is that it's better to get these settled and have time for them to clear off the reports and then pay back a small loan than to try to hustle and come up with the money and being paying these off and waiting for them to clear, etc as we get closer to the end of the lease.

Anonymous · ‎04-10-2015

@Anonymous wrote:
If renewing the lease were an option, I'd be all over it. But it's not. We have two years of excellent rent history here, but we now exceed the max occupancy clause so they will not allow us to renew. When the lease is up we will have been here 2 full years and we have a excellent letter of recommendation/reference from our landlord before this even though we were only there 10 months.

DH's job is presuring us to move closer, it's part of his job description that he needs to be available on a moment's notice and we currently live 45+ minutes out depending on traffic because this was all we could find on 3 weeks notice when he transferred to this office. Rentals available to our family size in that area run $1800+/m. That's double what we currently pay.

I'm working my rear off to come up with the cash to PFD these, but DH is still lobbying for pulling the minimum needed out of the 401k, settling them and then putting the hustle into paying off that loan.

I know on the larger level of interest, etc that it's a bad idea. But I guess what I'm asking is if we pull out $2500 on a loan, but still have $9k+ available as reserves on a hardship pull, is that hurting us on the mortgage app any more or less than the collections? It's likely we'd have the loan paid off before closing anyway. But DH's throught process is that it's better to get these settled and have time for them to clear off the reports and then pay back a small loan than to try to hustle and come up with the money and being paying these off and waiting for them to clear, etc as we get closer to the end of the lease.

You do appear to be in a very hard place. How fast do you think you could pay back the loan? As long as you make it a priority, you'll get it done quickly. Remember that you have to pay back your 401k loan with interest, and if you don't you get hit with lots of penalties and fees. However, your thought process is sound. Just make sure it is a one-time thing. It can get easy to look at the 401k as an extra bank account, to be drawn against whenevr you need cash; however, that way leads to impaired retirement. Slippery slopes and all that.

Sounds like you and DH are thinking about this the right way though. I wish you the best of luck.

Anonymous · ‎04-10-2015

@Anonymous wrote:
@Anonymous wrote:
If renewing the lease were an option, I'd be all over it. But it's not. We have two years of excellent rent history here, but we now exceed the max occupancy clause so they will not allow us to renew. When the lease is up we will have been here 2 full years and we have a excellent letter of recommendation/reference from our landlord before this even though we were only there 10 months.

DH's job is presuring us to move closer, it's part of his job description that he needs to be available on a moment's notice and we currently live 45+ minutes out depending on traffic because this was all we could find on 3 weeks notice when he transferred to this office. Rentals available to our family size in that area run $1800+/m. That's double what we currently pay.

I'm working my rear off to come up with the cash to PFD these, but DH is still lobbying for pulling the minimum needed out of the 401k, settling them and then putting the hustle into paying off that loan.

I know on the larger level of interest, etc that it's a bad idea. But I guess what I'm asking is if we pull out $2500 on a loan, but still have $9k+ available as reserves on a hardship pull, is that hurting us on the mortgage app any more or less than the collections? It's likely we'd have the loan paid off before closing anyway. But DH's throught process is that it's better to get these settled and have time for them to clear off the reports and then pay back a small loan than to try to hustle and come up with the money and being paying these off and waiting for them to clear, etc as we get closer to the end of the lease.
You do appear to be in a very hard place. How fast do you think you could pay back the loan? As long as you make it a priority, you'll get it done quickly. Remember that you have to pay back your 401k loan with interest, and if you don't you get hit with lots of penalties and fees. However, your thought process is sound. Just make sure it is a one-time thing. It can get easy to look at the 401k as an extra bank account, to be drawn against whenevr you need cash; however, that way leads to impaired retirement. Slippery slopes and all that.

Sounds like you and DH are thinking about this the right way though. I wish you the best of luck.

We actually had to draw a loan off of it when we moved from KS to MI in 2012, so we're very familiar with the fees and process, etc. We do NOT take this lightly at all and it's a last resort thing to go this route. For the amount we need, we won't incur fees and it totals about $200 in interest, so it's not terrible other than losing that compund interest power while we're paying it back. It would be paid off by October at the latest, but more likely before June or July. You're right though, the prioritities get paid quickly and we always do well when we buckle down and tackle somethin. These wouldn't be an issue to cash flow if we didn't have to be at the mercy of the CRA's updating with the looming end of the lease.

Anonymous · ‎04-10-2015

A 401(k) loan is not factored into your DTI.

Anonymous · ‎04-10-2015

@Anonymous wrote:
A 401(k) loan is not factored into your DTI.

That's good to know. Will the payment showing on the paystud detract from his income calculations? DH is debating on whether it's best to take the minimum out to settle or to take the max loan and put the rest in savings, it would be there to pay off when we have the rest of it, too. Our plan only allows for one loan at a time, so I guess he's worried we'll do this and something else will pop up at closing and we don't have any way to take care of that. Just wondering if it will be better to have the 401k sitting as reserves or take out a larger loan and have reserves in our savings account. Any insight?

Anonymous · ‎04-10-2015

@Anonymous wrote:
@Anonymous wrote:
A 401(k) loan is not factored into your DTI.
That's good to know. Will the payment showing on the paystud detract from his income calculations? DH is debating on whether it's best to take the minimum out to settle or to take the max loan and put the rest in savings, it would be there to pay off when we have the rest of it, too. Our plan only allows for one loan at a time, so I guess he's worried we'll do this and something else will pop up at closing and we don't have any way to take care of that. Just wondering if it will be better to have the 401k sitting as reserves or take out a larger loan and have reserves in our savings account. Any insight?

I would not take out more than you need, as you will lose the benefit of compounding interest. Technically the 401k loan can only go towards the closing costs/down payment, not your savings (unless you do a hardship distribution). But if it makes you feel more secure to have some cash in savings, you can take out a 401k loan for the full amount of the closing costs, and move the cash you were going to use to close into your savings. It really depends on what makes you feel more comfortable.