I am planning on using my 401k with my current employer for part of my reserves requirement. I understand that if the only way I can withdraw funds is if I leave my job, I can't use these funds, however my employer allows 401k loans as well as hardship withdrawals (e.g. to avoid foreclosure on a primary home). The hardship withdrawal may only be taken if all other options are exhausted, so in the case of a hardship I would have to take out a 401k loan first, then do the hardship withdrawal. Loans are capped at 50 percent of the vested balance, and hardship withdrawals are 100% of my contributions only, not employer contributions.
My question is what amount would count as reserves from this account. As a hypothetical, let's say my vested balance is $20k, but my own contributions are only $5k. I am thinking in the event of a hardship I could take out a $10k 401k loan, then withdraw my $5k in contributions, for a total of $15k. The remaining $5k of the balance is not accessible and therefore can't be used towards reserves. I assume the lender would only allow 60% of the $15k to be used as reserves (if that is their percentage). Or would they allow the full amount of the $10k loan since there is no penalty/taxes on that, plus 60% of the $5k hardship withdrawal?
60% of the vested balance. So if the vested balance is $20k (and there are no outsanding loans) then it'd count as $12k of reserves.
If you took out a $10k loan, and withdrew an additional $5k, then the remaining balance would just be $5k... and then the 401k would count as $3k of reserves.
However, if you kept the funds from the $10k loan & $5k withdraw in your own bank account, then you'd have $15k in checking/savings + $3k in reserves from the 401k = $18k total to qualify with (the $15k could be used as "funds to close" and/or reserves, and the $3k would just be considered reserves).
That is.... odd. So I guess it would be beneficial to take out the loan, probably not the hardship amount though unless absolutely needed since I would be facing the 10% penalty for that plus taxes, even though it is allowed for the purchase of a primary home. It only costs $50 in fees to take out the loan, and if I don't need it for actual costs, I can pay it back right after closing. That will effectively allow 20% more of the account balance to be considered. Is that correct? Also - at what point should I actually take out the 401k loan, do I need to do that before getting pre-approved or can I just let the loan officer know that's what I intend to do before closing? Waiting longer would be better considering there will be additional contributions made to the account every two weeks...
Solely relating to giving you more funds to qualify with (funds to close & reserves), then yes, taking out a loan would give you more than if you just left the entire amount in the 401k.
You can just let the loan officer know at the beginning that is what you plan on doing - taking out a $10k loan. Then the loan officer will add that full $10k under "Secured borrowed funds, not yet deposited" and will only list 60% of the remaining vested balance after the $10k is deducted from the current vested balance.
I recommend the 401k funds are deposited into your own account ~2 weeks prior to closing. You'll need to supply: a copy of the 401k check (or it's fine if it's direct deposited), a copy of the bank statement showing the funds deposited and in "available funds", and a new 401k statement (actual or a printout from the website) showing the new balance after the $10k 401k loan was taken out.
Also, to use any 401k funds to qualify, you'll need to provide the Summary Plan Description which contains the detailed info on withdraws & loans.