Investor · McKinney, TX · Member since 2016 · 50 posts · 26 votes
Assuming good credit and income could I get a mortgage on a rental by using a 401(k) loan as the 20% down payment? What about a private loan from a family member?
Gift from family, yes - if it's a property you will owner occupy.
401k loan as a means to get started is actually great for a few reasons, that I will take this opportunity to plug because for some reason not a lot of people talk about this.
Your employer matching funds, unbeknownst to them, was actually your employer matching your down payment funds! If you asked for a raise just to help you save up a down payment, your employer would probably say "lol, no." This is where you can jack up your 401k contribution to the max that your employer will match, in order to say "How about YES to that pay raise for my down payment savings, Mr Employer? And you didn't even realize it! TYVM."
Tax advantaged.
Paying interest back to yourself... there are worse things in life than owing your own retirement account money, and your retirement account collecting interest from yourself.
In our mortgage math, we don't count 401k loan payments against you for DTI purposes. This is the only type of loan where we will not count the payment against you.
Talk with your 401k people ahead of time, before altering your retirement/savings strategy in any way. I'm not a 401k expert, and there are restrictions that apply to how much you can pull from the 401k without the tax man coming after you.
Real Estate Broker · Marietta, GA · Member since 2014 · 135 posts · 105 votes
9y
Yes and Yes. For the 401k loan, your monthly repayment amount will be included in your DTI. If the family member states the money is a "gift" then it won't count towards your DTI. If its a true loan, it'll count towards the DTI.
You'll also need to have adequate reserves to cover both your mortgage and the investment property's mortgage.
Gift from family, yes - if it's a property you will owner occupy.
401k loan as a means to get started is actually great for a few reasons, that I will take this opportunity to plug because for some reason not a lot of people talk about this.
Your employer matching funds, unbeknownst to them, was actually your employer matching your down payment funds! If you asked for a raise just to help you save up a down payment, your employer would probably say "lol, no." This is where you can jack up your 401k contribution to the max that your employer will match, in order to say "How about YES to that pay raise for my down payment savings, Mr Employer? And you didn't even realize it! TYVM."
Tax advantaged.
Paying interest back to yourself... there are worse things in life than owing your own retirement account money, and your retirement account collecting interest from yourself.
In our mortgage math, we don't count 401k loan payments against you for DTI purposes. This is the only type of loan where we will not count the payment against you.
Talk with your 401k people ahead of time, before altering your retirement/savings strategy in any way. I'm not a 401k expert, and there are restrictions that apply to how much you can pull from the 401k without the tax man coming after you.
Investor · McKinney, TX · Member since 2016 · 50 posts · 26 votes
9y
This is great info, thanks! In addition to the down payment, what kind of reserves would be normal/needed? A couple months of mortgage payments? For example, if mortgage + tax + ins is $1,000/mo the lender would want me to have ______ in excess of the down payment.
For your first investment property, just put six months of PITI as your target reserve number. And actually now that I think about it, go talk to your 401k people about using a 401k loan for an investment property. I don't know if it's the same for all of them, or if it varies by institution.
Retirement accounts can be counted at 60% of value for PITI reserves, non-retirement stocks and mutual funds at 70% of value.
So, yes, you come across completely absurd situations where someone doesn't quite have the reserves if it's being counted at 70% of value, so they have to liquidate stock to put it in a checking account just for an underwriter to look at and go, "hrmm, well it's in a checking account now" and count it at 100% of value, and they put it right back into the stock market the day after closing.