I am considering House Hacking in about 6 months or so. I am trying to put myself in a good financial position to buy a good property to do some cosmetic work. I was planning on using low money down (FHA/ 5 % conventional) to acquire it. I could max the contribution for my 401k as my expenses are low for 6 months and take out an 401k loan towards the down payment 6 months from now (have around 10k on my 401k by then). I would also have saved around 25k in cash by 6 months. Do loan officers allow you to use a 401k loan for a down payment on a primary residence?
Also, what would you do in my position? Would you max your 401k ( only reason I am doing this is for loans to use for real estate) or just save all the cash to buy the property for house hacking?
Here are the general considerations regarding 401k loans.
401k Participant Loans
If your 401k plan allows for 401k participant loans, the maximum loan amount is equal to 50% of the balance up to $50k. The repayment terms for a 401k participant loan are equal monthly/quarterly payments of principal and interest (typically prime plus 1%) over a 5 year term (longer if used to acquire your principal residence).
Please note that if you take a full $50,000 and then pay back the loan, you can't take another $50,000 until 12 months after the first loan was fully paid back.
Per the loan offset rules that went into effect with the 2018 Tax and Job Act: if you leave your job and the loan is current at the time you leave your job but then the loan goes into default because you left your job, you will have until your tax return deadline (including any timely filed extension) to make the loan current by depositing the outstanding balance into an IRA (and thereby avoid the taxes and penalties that would otherwise apply).
Rental Property Investor · Irvine, CA · Member since 2018 · 35 posts · 19 votes
6y
@Juan M Restrepo If your company's 401k has loan provision (yes, surprisingly not all 401k allows borrowing) you should be able to borrow it for your PR purchase. In fact, buying a house is a very common reason for employees to take a loan out. What you may need to be aware, in terms of budgeting, is that typically 401k will only allow you borrow up to 50% of your vested balance, so in your case of 10k balance, you may only be allowed to take out 5k, with some minimal fees and all that, you should consider if that is still a viable option for your situation.
You can only take out a percentage of your 401k. The money from the loan will be deposited into your bank account. I was only allowed to take one loan out with my loan officer.
Thanks for the replies guys, I was just interested as a down payment. To my understanding lenders do not allow to take out a loan to pay your down payment ( defeats the purpose of a down payment). For personal loans some loan officers do not allow that as a down payment. I was wondering if 401k loans were any different.
Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
6y
@Juan M Restrepo you can 100% without a doubt take a loan from your 401k to purchase a home. You can do this with both your primary home (FHA, VA, Fannie/Freddie) and an investment property (Fannie/Freddie types of loans). Hope this helps!
Here are the general considerations regarding 401k loans.
401k Participant Loans
If your 401k plan allows for 401k participant loans, the maximum loan amount is equal to 50% of the balance up to $50k. The repayment terms for a 401k participant loan are equal monthly/quarterly payments of principal and interest (typically prime plus 1%) over a 5 year term (longer if used to acquire your principal residence).
Please note that if you take a full $50,000 and then pay back the loan, you can't take another $50,000 until 12 months after the first loan was fully paid back.
Per the loan offset rules that went into effect with the 2018 Tax and Job Act: if you leave your job and the loan is current at the time you leave your job but then the loan goes into default because you left your job, you will have until your tax return deadline (including any timely filed extension) to make the loan current by depositing the outstanding balance into an IRA (and thereby avoid the taxes and penalties that would otherwise apply).