First Time Homebuyer Information & Education
Down Payment from 401K or 403B Retirement Annuity
Down Payment from 401K or 403B Retirement Annuity - If you are purchasing a home and have a substantial portion of your assets inside of a retirement account such as a 401K, 403B or other retirement product or annuity, you may choose the increasingly popular option of tapping those funds to make a down payment on your new home. Like any other accounts you may have in your name, such as brokerage accounts and bank checking, savings and money market accounts, most popular retirement accounts qualify as assets to be counted toward your “reserves”, a measure used by mortgage lenders to determine how many months of payments you must have in order to serve as a buffer covering payments you might miss if there were any interruption of your income.
Borrowers planning on using money from their 401k should try to find other resources. This transaction is considered a Hardship withdrawal and will come with a 10% penalty.
It is important to speak with your human resources department as well as your tax professional to determine whether borrowing against your retirement account or taking a straight withdrawal is the best option for you. Be sure to review all possible avenues to access your money.
Retirement accounts such as 401(k) or 403(b) annuity accounts are generally administered or sponsored in whole or in part by your employer. In addition to serving as excellent documentation of your earnings and savings, your 401K or 403B accounts can be used in a variety of ways to help finance your new home purchase. Depending on the specific restrictions applied to your account, you may have the option of withdrawing money directly from the account or “borrowing” money in the form of a loan (against your own funds) which is repaid at a generally low rate of interest. Regardless of whether you cash money out of your account or take a loan against it, be sure to thoroughly document any details of the transaction, including any withdrawal or loan application paperwork, demand drafts, cashier’s checks, deposit tickets, etc. for the purpose of substantiating this source of funds to your lender.
Lenders do treat down payment money from retirement accounts differently from program to program and state to state, sometimes from case to case. In particular, borrowing money in the form of a loan may increase what the lender perceives as your monthly debt obligations, because even though you are borrowing money from your own account, you are still obligated to make a payment every month which you wouldn’t have to make otherwise, and lenders will often consider this to be detrimental to your qualifying DTI or Debt to Income Ratio, making it harder to borrow as much money as you may need. On the other hand, cashing out any type of retirement account will almost always create a taxable event and sometimes also a penalty fee, which generally accounts to more than the nominal interest rate common to the loan option. Speak with your loan officer about the requirements of your individual program and weight the options with him/her or another trusted financial professional.
You may also consider speaking to your employer about any down payment assistance programs which may be available to you as part of your benefits package. These can come in many forms, but it is important to clarify with your employer that any down payment assistance granted does not amount to a loan and that there is no expectation of payment. Why would an employer want to help you make a down payment? Call them old fashioned, but most companies do want their employees to stick with them, and if your employer helped you achieve ownership of your dream home, how would you feel about them?
As with the 401K, 403B or other retirement account options, down payment assistance from your employer should be documented in detail and all copies of communication, checks, deposit tickets and statements of account, along with signed records stipulating that the funds are given freely and not to be repaid, should be kept for submission to your lender.
If you intend to withdraw funds from these types of accounts to use towards your down payment, be sure to let your mortgage consultant know in advance, as these transactions can take a considerable amount of time to be processed.
Quite often if your down payment comes from your 401k or retirement fund, there is no penalty. Speak to competant tax professional and mortgage broker.
Penalty for using my 401k for down payment - What will the penalties be for using my 401k for a down payment on a primary residence for my first home? Is it true that I can withdraw my 401k penalty free if I use this money for my home purchase? Are there any tax implications to use my 401k for the purchase of a new home? How can I get around the penalties and/or taxes and avoid having to pay them? These are many of the different questions and more common questions that are asked by consumers about using their 401ks to apply towards the purchase of a home. Read on to find out the answers to these questions and many other questions about 401ks and early withdrawal rules and guidelines.
The IRS allows for withdrawal of money from your 401k to purchase a primary residence. However, your employer does not have to permit a hardship withdrawal or any type of withdrawal for that matter. Some employers will permit hardship withdrawals and/or loans against a 401k while others will not. If your employer does permit a hardship withdrawal and your request is approved, then this money will be subject to a 10% penalty if you are under age 59.5 and you will still be required to pay taxes on this money as it will be treated as normal income since the money was put into the account pre-tax. Therefore, a loan against your 401k for down payment is more recommended than a hardship withdrawal but if that is your only source and/or only way to purchase a home then you need to consider a withdrawal still.
Besides the penalties listed above, there is also the "opportunity costs" to consider. When you withdraw from your 401(k) those funds are no longer gaining interest, you may miss out on a market opportunity that could significantly increase the value of your investments. The opposite is also true with those funds withdrawn, you may miss out on a market change that would have decreased the value.
If you decide to withdraw from your 401K to secure down payment money be sure and let your mortgage broker know about the 401K loan at time of application. The monthly payment on the 401K loan will count against your monthly debt ratios and must be accounted for by you mortgage broker to structure the loan properly.
Information listed above is to be used for educational purposes only and is not guaranteed
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