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Does It Matter How You Take Funds From 401K for DP?

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Frequent Contributor

Does It Matter How You Take Funds From 401K for DP?

I MAY need to do an actual withdrawal because I am unable to get a loan against my 401K for a down payment.  I realize it's not ideal, but there is a whole backstory as to why it's happening this way.  I just need to know if mortgage companies would have an issue regarding a withdrawal as opposed to a loan against my 401K.  Does anyone have any insight?

Current - FICO 3/2019: EX(753); EQ(763); TU(749)
Beginning - FICO 7/2014: EX(630); EQ(608); TU(581)
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Re: Does It Matter How You Take Funds From 401K for DP?


@dragonfly66 wrote:

I MAY need to do an actual withdrawal because I am unable to get a loan against my 401K for a down payment.  I realize it's not ideal, but there is a whole backstory as to why it's happening this way.  I just need to know if mortgage companies would have an issue regarding a withdrawal as opposed to a loan against my 401K.  Does anyone have any insight?


Yeah, my insight is DON'T! You're going to get hit with a 10% penalty right off the bat for early withdrawl. Then, 20% will get withheld by your plan provider for taxes. Now that you know all that, consider how much you will actually have to withdraw to cover those penalties and withholdings and be left with the amount you need. This money will be considered taxable income. When combined with your regular income, there's a chance that you will be bumped into a higher tax bracket.

 

In addition to this being a VERY, VERY expensive down payment, you will have to claim that much less money available for your mortgage reserves, since the 401k is currently one of your assets. I have a feeling it's your primary asset if you're considering taking money out of it for a down payment.

 

Borrowing against your 401k has its disadvantages as well. If you leave your company, you have to pay the loan back. If you don't, it's basically the same thing as taking a withdrawl. Same penalties and withholdings will be assessed.

 

Are you able to get a mortgage WITHOUT touching your 401k? That would be the least expensive way to go. 

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Re: Does It Matter How You Take Funds From 401K for DP?

 


@dragonfly66 wrote:

I MAY need to do an actual withdrawal because I am unable to get a loan against my 401K for a down payment.  I realize it's not ideal, but there is a whole backstory as to why it's happening this way.  I just need to know if mortgage companies would have an issue regarding a withdrawal as opposed to a loan against my 401K.  Does anyone have any insight?


I don't think mortgage companies would care how you get the money out as long as they know where the money is coming from (i.e. not illegal). 

 

I assume you've looked through your 401k plan, know it offers hardship withdrawal, and that you meet the criteria.  I will assume also that you know how much this withdrawal will cost you in taxes and penalties.  If you any of my assumptions is incorrect, then I suggest doing more research.

 

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Re: Does It Matter How You Take Funds From 401K for DP?


@tacpoly wrote:

 


@dragonfly66 wrote:

I MAY need to do an actual withdrawal because I am unable to get a loan against my 401K for a down payment.  I realize it's not ideal, but there is a whole backstory as to why it's happening this way.  I just need to know if mortgage companies would have an issue regarding a withdrawal as opposed to a loan against my 401K.  Does anyone have any insight?


I don't think mortgage companies would care how you get the money out as long as they know where the money is coming from (i.e. not illegal). 

 

I assume you've looked through your 401k plan, know it offers hardship withdrawal, and that you meet the criteria.  I will assume also that you know how much this withdrawal will cost you in taxes and penalties.  If you any of my assumptions is incorrect, then I suggest doing more research.

 


Yes, I've spoken to my 401K plan administrator already about the hardship withdrawal and I would qualify.  I know about all of the penalties and the amount that would need to be withdrawn to cover that, as well as the tax hit the following year.  If I can avoid doing it this way, I certainly will, but right now I need to look at all of my options.  I suspected they wouldn't have an issue with the withdrawal since I'm pulling from my own available funds, I just wanted to see if anyone had any experiences where that method was an issue.

Current - FICO 3/2019: EX(753); EQ(763); TU(749)
Beginning - FICO 7/2014: EX(630); EQ(608); TU(581)
Credit: Wells Fargo Home Projects Charge Card ($7,800); Wells Fargo Home Rebate Visa ($4,000); Capital One Quicksilver ($10,000); Capital One Venture ($6,000); Discover it ($7,900); Macy's ($20,000); BrandsMart ($4,000); Banana Republic ($1,200); Lowes ($12,000); Amex Everyday ($30,000); Macy's Amex ($15,000); Amex Platinum (NPSL); Citi Diamond Preferred ($9,000); Chase Freedom ($9,000); Wells Fargo Outdoor Solutions ($10,000); SunTrust HELOC ($25,000)
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Frequent Contributor

Re: Does It Matter How You Take Funds From 401K for DP?


@DriverMacGyver wrote:

@dragonfly66 wrote:

I MAY need to do an actual withdrawal because I am unable to get a loan against my 401K for a down payment.  I realize it's not ideal, but there is a whole backstory as to why it's happening this way.  I just need to know if mortgage companies would have an issue regarding a withdrawal as opposed to a loan against my 401K.  Does anyone have any insight?


Yeah, my insight is DON'T! You're going to get hit with a 10% penalty right off the bat for early withdrawl. Then, 20% will get withheld by your plan provider for taxes. Now that you know all that, consider how much you will actually have to withdraw to cover those penalties and withholdings and be left with the amount you need. This money will be considered taxable income. When combined with your regular income, there's a chance that you will be bumped into a higher tax bracket.

 

In addition to this being a VERY, VERY expensive down payment, you will have to claim that much less money available for your mortgage reserves, since the 401k is currently one of your assets. I have a feeling it's your primary asset if you're considering taking money out of it for a down payment.

 

Borrowing against your 401k has its disadvantages as well. If you leave your company, you have to pay the loan back. If you don't, it's basically the same thing as taking a withdrawl. Same penalties and withholdings will be assessed.

 

Are you able to get a mortgage WITHOUT touching your 401k? That would be the least expensive way to go. 


I'm aware of paying the loan back if I leave the company, but I've been there 5 1/2 years now and don't have any plans to leave.  Also, my 401K plan doesn't assess penalties and witholdings on a loan, just a withdrawal.  I'm going to do what I can to avoid that scenario, I was just curious as to how that type of withdrawal is viewed by the mortgage companies.

Current - FICO 3/2019: EX(753); EQ(763); TU(749)
Beginning - FICO 7/2014: EX(630); EQ(608); TU(581)
Credit: Wells Fargo Home Projects Charge Card ($7,800); Wells Fargo Home Rebate Visa ($4,000); Capital One Quicksilver ($10,000); Capital One Venture ($6,000); Discover it ($7,900); Macy's ($20,000); BrandsMart ($4,000); Banana Republic ($1,200); Lowes ($12,000); Amex Everyday ($30,000); Macy's Amex ($15,000); Amex Platinum (NPSL); Citi Diamond Preferred ($9,000); Chase Freedom ($9,000); Wells Fargo Outdoor Solutions ($10,000); SunTrust HELOC ($25,000)
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Re: Does It Matter How You Take Funds From 401K for DP?

at the end of the day, you have to do what's important for YOU.  Sure, penalties are rough, but home ownership can very much make sense.  Especially if you're getting a good deal.  Can you 'season' the funds for 90 days?  That could make a difference.

 

Good luck to you!

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Re: Does It Matter How You Take Funds From 401K for DP?


@fishbjc wrote:

at the end of the day, you have to do what's important for YOU.  Sure, penalties are rough, but home ownership can very much make sense.  Especially if you're getting a good deal.  Can you 'season' the funds for 90 days?  That could make a difference.

 

Good luck to you!


Thanks, Fishbjc.  Yes I can season the funds for 90 days, but I thought the only reason for doing that is so that you don't have to worry about providing a bunch of documentation as to where the funds came from (which wouldn't be an issue since it's coming from my 401K).  Is there another benefit to seasoning my funds?

Current - FICO 3/2019: EX(753); EQ(763); TU(749)
Beginning - FICO 7/2014: EX(630); EQ(608); TU(581)
Credit: Wells Fargo Home Projects Charge Card ($7,800); Wells Fargo Home Rebate Visa ($4,000); Capital One Quicksilver ($10,000); Capital One Venture ($6,000); Discover it ($7,900); Macy's ($20,000); BrandsMart ($4,000); Banana Republic ($1,200); Lowes ($12,000); Amex Everyday ($30,000); Macy's Amex ($15,000); Amex Platinum (NPSL); Citi Diamond Preferred ($9,000); Chase Freedom ($9,000); Wells Fargo Outdoor Solutions ($10,000); SunTrust HELOC ($25,000)
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Re: Does It Matter How You Take Funds From 401K for DP?


@dragonfly66 wrote:

@fishbjc wrote:

at the end of the day, you have to do what's important for YOU.  Sure, penalties are rough, but home ownership can very much make sense.  Especially if you're getting a good deal.  Can you 'season' the funds for 90 days?  That could make a difference.

 

Good luck to you!


Thanks, Fishbjc.  Yes I can season the funds for 90 days, but I thought the only reason for doing that is so that you don't have to worry about providing a bunch of documentation as to where the funds came from (which wouldn't be an issue since it's coming from my 401K).  Is there another benefit to seasoning my funds?


Hi Dragonfly66,

 

Since you're pulling the money from your 401K you don't need to season it because it's already considered seasoned. In terms of lending guidelines, it does not make a difference whether you pull the money out or take a loan against your 401K UNLESS you're in a situation where you would need reserves to qualify. Typically on FHA & VA loans that is not the case but there are some scenarios that do.

 

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VA, FHA, USDA. Jumbo, Conventional.
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New Contributor

Re: Does It Matter How You Take Funds From 401K for DP?

I would echo the others in saying try to avoid this if possible, but it looks like you've considered the risks already.

 

For my borrowers using a DP from 401k, I'll ask for the 401k statement showing the withdrawal, and then current balance from the bank account  where it went (if not a check). We don't worry about those funds being seasoned (if indeed we know it's coming from a 401k, as borrowers sometimes hide this fact).

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