Friday, April 11, 2014

401K - Utilizing it for down payment or to lower debt to income ratios







A "tool" in the "tool box" that people often forget about...


Borrowers often forget about utilizing their own nest egg to help themselves today. I recently had a borrower who wanted an USDA loan, however they wanted to buy a home in a "City." I looked at her financial picture and had her look into her 401k loan as an option. She was able to take a 401K loan out and put 5% down. She purchased the home with a conventional mortgage. The great thing about borrowing from your 401K is, you pay yourself back the loan and pay interest to your own account. It can also help qualify or lower ratios by taking money out of it to pay off high interest debt. Our underwriters do not debt the borrower for the payment associated with the 401K loan.


Loans from 401(k) plans. Some 401(k) plans permit participants to borrow from the plan. The plan document must specify if loans are permitted. A loan from the 401(k) plan is not taxable if it meets the criteria below.

Generally, if permitted by the plan, a participant may borrow up to 50% of his or her vested account balance up to a maximum of $50,000. The loan must be repaid within 5 years, unless the loan is used to buy the participant’s main home. The loan repayments must be made in substantially level payments, at least quarterly, over the life of the loan. The rate is typically 1-2 points above prime (4.25-5.25%) , this would be yuor rate of return on the money borrowed.

The participant must reduce the $50,000 amount, above, if he or she already had an outstanding loan from the plan (or any other plan of the employer or related employer) during the 1-year period ending the day before the loan. The amount of the reduction is the participant’s highest outstanding loan balance during that period minus the outstanding balance on the date of the new loan.

 

 

 

 

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