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Refinance & Mortgage Tips: Down Payment From 401k Or 403b Retirement Annuities
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
Tristan Hunt
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