Earnest Cash And 401k

Nabuca · ‎08-21-2013

So, I'm exploring the option of using my 401k as a source to fund escrow, down payment, etc., for my USDA loan. I'm already approved, and am loking to make offers soon. So, my 401k administrator gave me a cryptic explanation that to use this withdrawl from my account, I would need a borrower and seller signed contract showing the costs due at closing to be pulled from my 401k. They couldn't offer me any better explanation than this.

Anyone know what this might mean? How would I know what's due at closing before we even begin the process? They said it could be used for earnest cash, but that's due when the offer is accepted. Why would the seller sign MY document for a loan from my 401k stating what costs I need to borrow? Has anyone ever done something like this, that can explain it in clear terms? My 401k admin is just reading from a corporate handbook, and it doesn't make sense.

RJA · ‎08-21-2013

You need to have your sales contract in order to pull money out of your 401k. This is the "hardship" explanation needed in order for the withdrawal. You are unable to just withdraw from your 401k - with the exception of a general purpose loan - and then usually you are limited to two loans. You most likely will need to do a loan first, then withdraw the rest of the funds needed. The seller is not signing off on your 401k, this is just the paperwork needed for your "Hardship" withdrawal.

You can go to the website for your 401k and it will explain the circumstances in which you can withdraw your funds and what documents are needed. For funds needed for purchase of a home - it is the sales contract. You may also use funds to save a home - in that case it is the Notice of Default.

Hopefully this clarified your question a little.

Nabuca · ‎08-21-2013

I am still a little fuzzy on the timeline of when this would take place. My 401k Admin assures me the loan could be used to fund earnest cash. But the seller will want earnest cash with the offer. There won't be any signed document prior to this point. Certainly not a sales contract. So how can the 401k loan be used for earnest cash?

StartingOver10 · ‎08-21-2013

Usually, on your offer to purchase, there is a spot for EMD and a spot to increase the EMD to a larger amount once the offer is accepted. For example, lets say you make an offer to purchase, you would put a small EMD of $1000 to $2500 and then increase the amount to X. This amount is different in different markets and different price points.

You also set the number of days you need in order to obtain the additional funds from your 401k.

Are you saying you don't have any funds whatsoever to put down to bind the offer without withdrawing from your 401k?

Amythyst · ‎08-21-2013

Right, I agree with what has been posted so far here. We actually did a hardship loan from our 401k to help pay for our closing costs on our new build. And basically I just had to fill out the hardship withdrawal request form and then provide proof to my HR department at work of the needed funds. The proof was in fact a copy of my contract and the fee worksheet showing how much money I was expected to pay.

So, unless you have some official document showing the actual funds needed for the mortgage then I don't think you can withdraw it just to put in an offer. This is supposed to be a last resort type of funding so they need to make sure you are definately going to be using it for what you say you are.

Sometimes earnest money deposts can be as little as 500 dollars... but you're probably going to need that upfront without relying on your 401k. Unless, like someone else said, you can just do a general purpose loan first. For us, we had to pay 5k for earnest money (this was a new build) and the builder let us make monthly payments on it.

Nabuca · ‎08-21-2013

Yea, I could put down 500 or whatever. The thing is, my 401k rules are kind of lame. If I take anything out, I can't increase unless I first pay the balance back in full. So I can't for example pull 2k for earnest cash, then extend another amount when I figure out the closing costs. The way it sounds from the timing and the documents, I wouldn't be able to withdraw anything until I have a final number, at which point everything will have already been placed in escrow and payments used for things like a home inspection, etc..

I guess I don't get the point of this. To be quite honest, I'm seriously reconsidering whether I want the hassles of owning a home myself at this point. We aren't even into the deep end of the pool and I'm already way over my head and stressed and confused.

StartingOver10 · ‎08-21-2013

@Nabuca wrote:
Yea, I could put down 500 or whatever. The thing is, my 401k rules are kind of lame. If I take anything out, I can't increase unless I first pay the balance back in full. So I can't for example pull 2k for earnest cash, then extend another amount when I figure out the closing costs. The way it sounds from the timing and the documents, I wouldn't be able to withdraw anything until I have a final number, at which point everything will have already been placed in escrow and payments used for things like a home inspection, etc..

I guess I don't get the point of this. To be quite honest, I'm seriously reconsidering whether I want the hassles of owning a home myself at this point. We aren't even into the deep end of the pool and I'm already way over my head and stressed and confused.

^^^Very wise of you to recognize this point above. Buying a home is not something to jump into without resources. It is a much more pleasant experience to have enough in reserves of your own rather than relying on a hardship withdrawal from your retirement fund. Don't put yourself in such a stressful situation that the entire purchase becomes a burden rather than a search to find the right home. If $500 is difficult for you to fund now without an expectation of replinshment from your 401k, then take a step back and think about when it would be better to purchase. The time is right when you are ready.

Amythyst · ‎08-21-2013

Well, I had a loan against my 401k already and was still able to do a hardship withdrawal... I am not sure if the rules vary by company. But I agree with the above, if just getting the earnest money is difficult then it may not be the right time. I was lucky we were able to make monthly payments on our earnest money but I was doing 1k a month from my own funds and then saving for our downpayment at the same time. The whole process is a pain in the ass and you have to really want the house and be ready for it to go through all the stress and the monies you need and then all the stuff you gotta buy after you get the house (we're renters so we don't have lawn mowers and stuff).

Usually, when its the right time things just sort of fall into place.... Good luck though!