So here's the situation...my lease is up in May and originally I planned to sign another 6-9 month lease so that I could save money for a downpayment for a single-family house say 300k. I make about 160k so I planned to save 15-20k the first 6 months of the year so that would put me at about 5% down for a conventional loan. So I planned to get the ball rolling in about 6 months...then it would take 4-6 months to build and planned to continue saving at a higher than normal rate to have more to add to downpayment/closing costs.
I just found out that I might be looking at a $500 increase in rent so it would be about 2k a month for an apartment. Yes I can afford to pay that but i think it's ridiculous for an apartment, and rental rates are increasing rapidly here so I don't think it's going to get any better. I don't think I'm ready to commit to the single-family home; I feel like I'm rushed so I think it would be a hasty decision. I did some searching and found some new construction townhomes that I think fit my current situation better that are either just under 200k or just slightly above. Townhomes in this area are rare that are decently priced (some can be as high as a single-family home) so this is a steal and there aren't many available in this neighborhood. So now I'm looking at a timing issue. There's one that is available now that pretty much has everything in it that I would have picked minus a few things (but I can live with it) that's about 195k, and there are two others in the pipeline one around April and the other in June. But either way I basically would have to put in an offer now for any of those options to pull it off the market. So it's about 6 months sooner than I would have liked financially.
Between paying off debt, helping out a family member prevent foreclosure on their home, and some lawyer fees my savings have taken quite the hit. So right now I probably have 12k savings that are liquid. They require 5k earnest money so that would only leave me with 7k for emergencies. If I wanted to move on the one that's available I could probably make it work with FHA but I would be concerned about reserves. I have a 401k with about 53k in it that I believe can count as reserves but if I had an emergency I wouldn't be comfortable with not having something that I could access immediately (I do have a PLOC with my bank for 7.5k but don't that to be my only source of an emergecy fund).
I've gone through pre-qual, and from a debt-to-income ratio the loan officer said I would probably not have an issue getting approved up to 400k...so I think getting approved won't be a problem for this amount just reserves and funding upfront expenses. So since time is short I'm thinking of utilizing a 401k loan for home purchase. I know I know, I shouldn't touch it but I think this would be a smart decision to get something reasonably priced now that 6 months from now either won't be available or the price and/or interest rates have gone up; and I will increase spending by 3k over the 6 months in increased rent.
So if anyone who has done a 401k loan...how does it work?
- Can you take out for both downpayment and closing costs? Or is it related specifically to your downpayment? If you can include closing costs, do you need to have the exact amount?
- I think I would want to take enough to do 5% so I could go conventional and enough for closing costs...obviously I don't know how much closing costs would be right now she worked out an estimate so if I asked for say 18k and it only ended up being 15k, will I be penalized somehow?
- And at what point would I need to request the loan from my 401k administrator before or after I go through preapproval?
- Can earnest money come from your 401k? I do have 5k I can put down for the earnest money, but I'm a worrier and I like to have cash on hand for emergencies. But I guess I would recover half or a little over half in a month from normal income so maybe that's not a big deal.
With the interest rate/taxes/hoa/mortgage insurance...based on the FHA estimate she did for me my monthly mortgage would be about $1660 so only like $100 more than what I pay in rent currently. So it's definitely something I can afford, it's just the timing of it all that if I want to go this route I need to act sooner than I budgeted.
Any insight would be appreciated!
So get approval first then get 401k loan? Just tell lender I'm planning to get the funds from my 401k?
I guess I'm a little confused b/c earnest money can be paid before an approval right? So just figuring how that would work if I did decide to take the earnest money from my 401k plan as well if I haven't gone through the approval process yet. B/c I know my retirement administrator only allows one loan out at a time so I wouldn't be able to say get 5k now for earnest money and then get more for the rest.
@ShanetheMortgageMan wrote:Could be possible to get $5k out from the 401k for the EMD, repay it with your own funds, and then get a new 401k loan out for the down payment prior to closing. Sounds like a logistical mess, but it may be OK. You'd have to check that plan with the 401k administrator, there could be a minimum time you need to wait between taking out 401k loans. Most people usually take the 401k loan out after they have an accepted contract, however I've seen some take them out prior to making offers and then they just take out a lump sum and after they close they just repay whatever portion if it they didn't need to use.
Check if you can do this as well. For my plan, there is no penalty for prepayment, but if you want to pay off more than the amounts that are automatically deducted, you have to pay back the entire loan. There is no option to make any additional payments other than to pay back the entire loan.
Starting Score: ~500 (12/01/2008)
@Walt_K wrote:
@ShanetheMortgageMan wrote:Could be possible to get $5k out from the 401k for the EMD, repay it with your own funds, and then get a new 401k loan out for the down payment prior to closing. Sounds like a logistical mess, but it may be OK. You'd have to check that plan with the 401k administrator, there could be a minimum time you need to wait between taking out 401k loans. Most people usually take the 401k loan out after they have an accepted contract, however I've seen some take them out prior to making offers and then they just take out a lump sum and after they close they just repay whatever portion if it they didn't need to use.
Check if you can do this as well. For my plan, there is no penalty for prepayment, but if you want to pay off more than the amounts that are automatically deducted, you have to pay back the entire loan. There is no option to make any additional payments other than to pay back the entire loan.
So another question...if I take out an amount based on an estimate and I have something left over and if I run into a situation where I cannot repay the leftover amount because of prepay rules will I be penalized for taking out more than what I spent on total housing downpayment/closing costs? Owe taxes on the extra amount not used or anything? In that case I guess it's better to underestimate?