401k loan

21 Replies

Hello,

If you borrow from your 401K through an employer, is it typically 50% of the account balance that you can borrow or is it 50% of the employee's contributions?  In our case there are earnings and employer matching funds to be considered.  Thanks in advance for guidance.  

Why do you want to borrow from your 401K?  BAD BAD BAD idea. Why?

We want a small loan for a down payment on a rental property.  My understanding is that the interest rate is low and you are paying the interest back to yourself, so it beats a lot of other options for obtaining funds.

The law allows 50% of vested balance or $50,000 whichever is smaller..

Keep in mind if you leave your job before pay off, they will request the full amount.

It's 50% of the account balance up to a max of $50k typically.

Borrowing for a down payment is generally not allowed by lenders. You usually sign a statement indicating that none of the funds are borrowed.

If you borrow it now to boost your savings/emergency fund and then wait through two bank statements showing those funds ( excluding the deposit) - so 60-90 days -then you can use your savings as a down payment.

Or, if you can borrow enough from other sources to pay cash for a house (and get the house at ~75-80% of market value), then you can do an immediate cash out refi and your equity will be the bulk of your down payment (search internet for Delayed Financing Exception).

I recently closed my first refi like this and am starting a second on a house just closed with cash.

@Doug McLeod  

I used a 401k loan to make a down payment and the bank was fully aware of it. 

BIG BIG BIG penalties to borrow from YOUR 401K.  Someone else with a 401K could lend you funds.  you return their funds plus a flat 10%rate.  They get tax free money. Your the money use need minus the BIG BIG BIG penalties and the profit from your rental.  

just my two cent worth

Originally posted by @Doug McLeod:

It's 50% of the account balance up to a max of $50k typically.

Borrowing for a down payment is generally not allowed by lenders. You usually sign a statement indicating that none of the funds are borrowed.

If you borrow it now to boost your savings/emergency fund and then wait through two bank statements showing those funds ( excluding the deposit) - so 60-90 days -then you can use your savings as a down payment.

Or, if you can borrow enough from other sources to pay cash for a house (and get the house at ~75-80% of market value), then you can do an immediate cash out refi and your equity will be the bulk of your down payment (search internet for Delayed Financing Exception).

I recently closed my first refi like this and am starting a second on a house just closed with cash.

Doug I am not sure where you got that information but, you can borrow for a down payment as long as the borrowed funds are from a secured source (an asset). I think you may be confusing borrowing from unsecured sources such as signature line of credit, unsecured term loan, etc. If you're borrowing from an unsecured (not backed by anything) then yes you cannot use those funds for down payment unless you season the funds for 2 full bank statements (which you mentioned 60-90 days). Seasoning the funds may take 60-90 at times but it depends on how far you are through each bank statement.

Keep in mind if you use the delayed financing exception you cannot get the cash back with out paying back all the loans used to purchase the home with cash. On DFE, I have been able to use cash out to pay back unsecured loans used to purchase the home but this is different then using unsecured loans/funds for a down payment since the unsecured funds were used to purchase as cash.

Albert Bui, Lender in CA (#345453), WA (#345453), TX (#345453), and TN (#345453)
949-514-5106

@Debra Leeson  and @Leslie Pappas  - if your job is relatively secure and/or your 401K balance is sufficient to cover any penalties and taxes in the even of a worst case scenario, this is quite safe - what in the world are you so worried about?  FEAR = False Evidence Appearing Real.  Not suggesting anyone blindly borrow from 401K, but you guys are hitting the panic button without any explanation to back up your concerns.

Account Closed - based on David's experience, I suggest you talk to some lenders and verify if any of them will allow downpayment to come from 401k loan.

Originally posted by @Debra Leeson:

BIG BIG BIG penalties to borrow from YOUR 401K.  Someone else with a 401K could lend you funds.  you return their funds plus a flat 10%rate.  They get tax free money. Your the money use need minus the BIG BIG BIG penalties and the profit from your rental.  

just my two cent worth

 Debra why would she want to borrow private/hard money for 10% interest rate when she can probably self bank from her own 401k loan for 4.25% (most likely 1+ prime rate) ? The 4.25% interest rate is paid back to her self.

With the 10% rate loan she is putting her rental at risk since the cash out flow is so high at least with the 4.25% she has a much lower payment if structured correctly.

There are no penalties to borrow from 401k's. There is a lot of misinformation on the BP website so beware what you read. 

I've done XXXX loans with 401k as down payments.

Yes if you leave some employers your outstanding loan may be considered a "distribution," which is taxable as earned income at applicable rates however some companies also have transfer options and continuation plans as well just know your company's 401k policies.

What do you mean the private investor gets 10% tax free money if she borrowed from them? Maybe tax deferred if they lent from their IRA or other....

Albert Bui, Lender in CA (#345453), WA (#345453), TX (#345453), and TN (#345453)
949-514-5106

hey Doug- I'm an investment advisor and real estate broker. Given our recent experience in the Great Recession, I believe retirement funds should be invested carefully. I've seen too many folks lose their retirement in part or in full. I think other monies can be invested more aggressively, perhaps. Just don't mess with retirement!

I have borrowed from my 401K and there are no penalties to doing this that I am aware of. I used the funds for a down payment on a rental property with no issue from my lender (not speaking for all lenders). This is my money that I am borrowing from myself and paying myself back with interest.  IMO, the money is no longer earning for me in my retirement account, but it is earning for me in the rental property. Plus it is cheap money! In regards to the concerns of risk, why do so many make the assumption that money invested in a 401k is some how safer or less risky? During the recent economic crash, there were a lot of people who saw their 401ks take steep drops in value they took a lifetime to build. I have far more control over the success of my rental properties (entry and exit) than I could every have over the mutual funds I am invested in. Furthermore, the rental properties are also for retirement :)

I do share the concern in regards to job stability or plans to leave your job because if you leave your employer, you will have to pay off the loan or you could get tagged with a distribution (penalties and taxes) depending on your plan.

I have borrowed from my 401k for four different financed real estate transactions (2 primary residence, 2 rentals), each using a different lender, and not a single one ever questioned it. It is a very common source for a down payment. Yes, the one risk to consider is losing your job and having to pay it back quickly (or take the penalty). But if your job is reasonably secure that is a calculated risk.

Borrowing to take a vacation or buy a new car would be a bad idea. But borrowing to wisely invest? That is totally within the spirit of 401k funds. A rental will add to your net worth, which will aid in your retirement. 

@Destiny Fargher  @Daren H.  You've captured our position.  The rental property investment is specifically for retirement.  We understand tangible rental property much better than we do other financial products, and we hope for better control over outcomes with a rental property.  My husband has no plans to leave his job and it's very unlikely that he would get laid off.  I don't know what the "penalties" are that people are talking about here.  It's not a distribution -- it's a short-term loan that should have very little impact on earnings in the long term, especially as we picked conservative investment options for the 401K.  

The "penalties" would come in if he left his job (or was laid off). At that point the loan becomes immediately due. If you can't pay it off right then, it is re-characterized as a distribution with penalties.

@Destiny Fargher  Oh yes, we are aware of that.  We don't expect that event to occur.  Also, in some cases the retirement account can be transferred as opposed to the employee having to take a distribution, right?  That's what happened with my former job.  

@Account Closed  

Some of the information posted here has been incorrect, which only leads to confusion. 

Although it is very unlikely for your situation, if your husband would get laid off the Plan administering his 401k would likely require the loan to be paid off in a short time period.  Failing to do so would cause the balance due to be viewed as a distribution, which would result in the penalty that is being mentioned.  That is my understanding of how it works.

One thing to note though is that just because banks will approve loans that include 401k funds as the source of down payment, it doesn't mean that a 401k loan can't negatively impact the bank's decision.  If the monthly payment on the 401k loan bumps you above their acceptable debt-to-income ratio, then the loan is not going to get approved.  That scenario isn't likely to play out unless the borrower is stretching their budget to buy in the first place.

I've just recently taken a small ($5k) loan out of my 401k and I'm not incurring any penalties. I didn't use it for a down payment on a property so I can't speak to that, but the comments saying that the interest rate is low and that you're paying it back to yourself are (at least in my case) accurate.

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