The Home Buyer's Korner

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October 20th, 2014

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FHA Down Payment & Retirement Accounts

nillionaireMaking a down payment on a house purchase can be incredibly difficult. Depending on your credit, eligibility and available loan programs, you might be able to get a VA home loans or USDA Rural Development loans with no down payment.  Other mortgage loans vary from, three and half percent, such as the FHA or FHA 203K home renovation loan. Fannie Mae offers a low three percent down payment loan, but has high credit standards with the low down payment loans, which may make it harder to secure.

If you have to come up with a sizeable down payment, your finances can be strained trying to come up with it. You may however not be aware you have the money available in a unique place. If you participate in a qualified retirement plan, things could be looking up.

The legislation establishing the existence of 401ks contains some beneficial clauses within it. Specifically, there is language that allows you to take loans from the retirement plan. Generally, the loan amount can equate to fifty percent of your vested interest.

Most Americans are terrible savers with one exception. They tend to stuff money into retirement plans because it makes sense, due in part that the contributions are at a pre-tax rate. If you have been contributing for a few years, you may have as a sufficient amount in your retirement account for some of all of the down payment.

Taking a loan from your retirement plan is not a slam dunk decision. Repayment issues have to be analyzed and typically have to be repaid within five years with interest. If you are considering using your retirement plan to secure the funds for a down payment make sure you talk with the individual in charge of the plan regarding how the process works.

In this blog post we’re going to focus on what FHA has to say about retirement accounts for a down payment.

The FHA offers a set of guidelines on how your lender should view a 401K, when it comes to calculating the debt-to-income ratio and other concerns.

Their written guidance is “Obligations not considered debt, and therefore not subtracted from gross income, include:

  1. Federal, state, and local taxes,
  2. Federal Insurance Contributions Act (FICA) or other retirement contributions, such as 401(k) accounts including repayment of debt secured by these funds)”.

Their guidelines also address availability of those asset and reads: “Up to 60% of the value of assets such as Individual Retirement Accounts (IRA), thrift savings plans, 401(k) and Keogh accounts may be included in the underwriting analysis, unless the borrower provides conclusive evidence that a higher percentage may be withdrawn, after subtracting any federal income tax and withdrawal penalties.”

FHA loan guidelines further state the evidence is required by the lender and the portion of the 401K not used to meet down payment and closing cost can be considered cash reserves.

Here’s where it gets a little complicated and you should discuss the policy with your lender before any withdrawals are made, as lenders vary on interpreting FHA’s guidelines. Some lenders interpret the need to pay back the funds to your 401K as a recurring debt, whereby they will use the monthly repayment when determining your debt-to-income ratio. This interpretation could disqualify you for excessive monthly obligations.

FHA guidelines provide for minimum requirements and standards, but in many cases lender may have higher requirements than the FHA minimum and permitted by FHA, as long as such requirements meet Fair Housing standards.  If you find yourself in this lose-lose scenario outlined in the paragraph above explore talking with other lenders, as I have mentioned the policy does vary from lender to lender.


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