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Refinance & Mortgage Tips: Down Payment From 401k Or 403b Retirement
Annuities
By: Tristan Hunt
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.
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’s
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 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.
About the Author:
Tristan Hunt is a seasoned financial professional with a wealth of experience in
the mortgage industry, advising clients on debt consolidation, refinancing &
investor loans. Website: http://www.RefinanceOne.net
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