Borrowing from 401k...

Anonymous · ‎08-10-2007

If I take a loan from my 401k for a down payment, does the mortgage lender factor that into my debt/income ratio? Conversely, does a lender consider my 401k balance into my assets? I am not going to have 20% to put down and figure borrowing from my 401k is better than a 2nd mortgage or PMI

Anonymous · ‎08-10-2007

I know I had asked a loan specialist that once and was told they do not factor it in your debt/income. I also believe your 401K is protected and can not be used as an asset. I do know that if you are buying your home or getting your home foreclosed on, you can withdraw the 401K money but you are taxed a HUGE amount if you do withdraw it without paying it back. The loan specialist I spoke with advised against withdrawing money from the 401K or even barrowing against it.

Mindnumb · ‎08-11-2007

If a 401 k were pledged to secure debt (same as an IRA) it would lose its tax exempt status and the the whole value of the 401 k would become taxable at the owners tax rate plus, probably a 10% penalty.

We have kept a 401k loan for 20 years and the only time it effected credit was for mortgages when they looked at pay stubs and saw the payment. The monthly payment was included in our total debt repayment obligation to income calculation.

Anonymous · ‎08-13-2007

Depends on the situation. Don't lose your home or car just because you steadfastly don't wish to use your 401k. It is YOUR money, after all.

Also - if you need assets just for loan approval ("reserves" as they're called) the 401k is counted at 70% of balance to account for tax penalties. I've found that a mortgage customer who is a "Level 3" approval (an intermediate area for Fannie Mae between subprime and prime) suddenly went "Approve/Eligible (regular prime loan) with a 401k of $90,000 included in the equation. And they didn't actually touch the 401k.

roscoe211 · ‎08-13-2007

My work has my 401k through Fidelity. A loan against my 401k is not reported to the CRAs. It doesn't affect fico in any way. If you withdraw early or don't repay the loan then it is taxed as income + a penalty i believe, still doesn't affect fico. It will however affect your assets, if you don't have the money in the account then its not an asset.

Anonymous · ‎08-14-2007

Well, I'm sure it doesn't happen the same way for every situation, but I can tell you how it worked for me (haven't closed yet, but assuming that some old creditors don't smell the blood in the water and throw some things on there that are just about to drop off anyway, it's a done deal).

The 401K is counted as an asset so long as I have a vested balance in it (my balance was only about $4K, so it didn't really make much difference);

A loan from the 401K would be calculated into my debt/income ratio as it is a new debt (a debt I would technically owe myself, but a debt nonetheless that does reduce the amount of money I have available to pay bills);

A withdrawal from the 401K is counted as cash on hand because they can explain where the money came from, it was my money to begin with, I was taxed on it, and it's not a new debt.

Are you sure that your 401K won't let you do a hardship withdrawal? Most do, and even though you have to pay a penalty and taxes on it, it beats the heck out of throwing your lender into a tailspin over new debt, and in the long run would definitely work out better for you. That's how I got the extra money I needed to close the deal...

Anonymous · ‎08-17-2007

Mindnumb wrote:
If a 401 k were pledged to secure debt (same as an IRA) it would lose its tax exempt status and the the whole value of the 401 k would become taxable at the owners tax rate plus, probably a 10% penalty.

A 401K loan is pledged to secure debt when a 401K loan is taken against it. Most employers do a payroll deduction so it's an automatic "no brainer" for the employee--cuts down on any collections hassles. Then tend to loan only half the value of the 401K--that way if the employee quits or something they can just liquidate the account per the terms of the loan agreement, PIF the loan, send the prerequisite withholding to IRS, and send anything left to the employee.

ronq · ‎08-24-2007

I know I can have borrowed from my 401k and it does not get reported to anyone. The loan is a payroll deduction and not reported to anyone, however remember that the money you borrow will significantly hurt you balance in the long term plus what you lose on your net pay. I would borrow from your 401k as an absolute last resort. It's ok to let them know how much is in there, they aren't really using it as collateral just as a if this borrower gets in trouble they have access to cash to save their house.

EX. 780 TU 794.

Anonymous · ‎08-25-2007

Mindnumb wrote:
If a 401 k were pledged to secure debt (same as an IRA) it would lose its tax exempt status and the the whole value of the 401 k would become taxable at the owners tax rate plus, probably a 10% penalty.

We have kept a 401k loan for 20 years and the only time it effected credit was for mortgages when they looked at pay stubs and saw the payment. The monthly payment was included in our total debt repayment obligation to income calculation.

They didn't even know about my 403(b) loan when I checked into a mortgage because my loan payment is taken directly from my checking account each month and they never mentioned bank statements as documents to bring in. But when I decide to move forward on a house, I'm sure they'll eventually want bank statements so I guess I need to start making extra payments to get the loan paid off, huh? My payment is only $50 a month but that will cut a big chunk out of the amount I can borrow for a home.