Borrow against my 401k to buy house?
I am 31 and moving from FL to SC. M job here did not match my 401k and I currently have about 2,000 in it. A friend of mine is a mortgage broker and he looked at my credit report and says that I would not have an issue qualifying for an FHA loan. The homes I am looking at are all around 90k. with 3% down I would need about $2500 (plus I have 2500 saved) . I plan on asking the sellers to pay clocing costs and/or price reduction to help with anything that may come up during the home inspection. My question is, since the 401k amount is only 2k would it be a good idea to borrow against it to help me get into a home? My mortage would be less than what I would pay renting and I am SOOOO ready for something that is all mine.
***My next employer will be matching my contribution which I plan on increasing to 5%
- Expert8675309Lv 71 decade agoFavorite Answer
Make sure that the loan officer isn't getting you an FHA 2-1 buydown.
Alot of loan officers are doing that with FHA loans and when people say that the "mortgage payment is less than the rent"...that is usually a dead giveaway for me....it's usually about the same, but not significantly less.
If you only have $2,000, go ahead and cash the 401K out...the tax penalty will be very minimal on that amount of money and you won't have to pay yourself back.
You also need to find out how much you need to have in reserves...FHA usually requrest for at least two months of reserves to be in savings and/or checking.Source(s): Former FHA underwriter.
- 1 decade ago
Can you borrow against your 401k? I can only borrow 50% of mine.
Most of the time you must repay any 401k loans when leaving a job or it is considered an early withdraw with all the tax and penalities that involves.
Glad to see your increasing your contribution on the new job. Congratualtions on the house.
- A.MercerLv 71 decade ago
I have a bad feeling about this.
3% down is too little for a house. The plan allows for it but does your budget allow for it. How much do you make in a year? What is your monthly take home pay? What kinds of bills do you have? What kinds of debt do you have? You need to figure out these things before you try to get a house. Don't rely on your broker friend to handle everything for you. I have heard of situations like this before where the broker put a friend into a bad situation because the friend basically trusted the broker too much.
I would recommend getting two books. They are "For Dummies" books but don't let that throw you off. They are good starting points. "Personal Finance for Dummies" and "Home Buying for Dummies". Read them and figure out exactly what is going on. Heck, lets toss in "401k's for Dummies" while we are at this. Those 3 books will probably cost you $50 but if you read them and learn from them they will save you countless dollars.
As for borrowing from the 401k, I would not advise it. One, when you leave the employer you will be expected to pay the money back. If you can't then you have to pay taxes and penalties on it. Also, many plans do not allow you to contribute more while you have an outstanding loan. Also, the loan is not paid back with pre-tax dollars. It is paid back with after tax dollars. That means you take out $2000, you are going to have to earn $2777.77 to put it back. After tax (assuming a 28% tax bracket) that will come to the $2000. But you are paying tax on what is supposed to be tax free investment if you borrow. Also, unless I am mistaken, you are moving from a state without a state income tax to one that has a state income tax. That will mean that your taxes are going to be more. Have you figured out what this will do to your budget? Finally, that $2000 will not be growing in your account while you have it borrowed.
What I do suggest. Find a nice rental in the area. Find something that is like 25% of your take home pay. It does not have to be a fancy place, just liveable. You are going to be in there for one year. Take that year to let your budget stabilize and for you to figure out exactly what your living costs are going to be. You do not want to get to South Carolina, get a job, get a house, and then find out that you are not making enough money to cover all of your expenses. Getting a house is a good thing but you can't just jump into it. Take your year to save as much as you can, learn as much as you can, and come up with a plan.
- Anonymous1 decade ago
I would do it. The market is bad right now. You are young and have a long time to save back up. Remeber that you will have to pay a penalty for withdrawing early. Property prices are ripe for the picking now. Cash it out and Go for it.
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- 1 decade ago
If you buy that house, it will be worth $81,000 by the end of 2008. and $72,900 by the end of 2009. Real estate is in a very serious bear market that will continue to decline for the awhile. You will end up paying more for your home than what it is really worth. Please be careful.