Does contributing more to 401k negatively impact my lendability

Question

Does maxing out my 401k negatively impact my ability to borrow from the bank? I.E does it reduce my income and therefore throw off my debt to income ratio or does the bank give me credit for those funds knowing I could theoretically just reduce contributions if needed during the loan period ? I’m able to save more right now,  but have a major real estate purchase coming in Q1 of 2022.. so I need to be cognizant that I’m keeping my debt to income ratio in line so I have no issues with financing when the time comes..

Aaron W. · Answer

@Aaron May That's great you are maxing out your 401k!

A lender should look at your gross pay when determining your debt-to-income, so your maxing out the 401k should not affect this. Maxing out may limit the amount of cash-on-hand to invest in real estate as you are likely investing it in stocks through the 401k, unless you have a self directed solo 401k or some other self directed account where you can use to invest in real estate.

If you want to raise your debt-to-income, then you should focus on raising your current income or reducing any recurring debt.

Best of luck!

Eddie Shumulinskiy · Answer

Thanks @AJ H. that makes sense. I just started talking to a lender and going through the process for a loan and they were very focused on gross income. I guess the reasoning is the bank needs to make sure you can cover the monthly payment. So if your investing into your 401k you can always opt out and still be able to cover your monthly payment.

@Aaron May, it also probably has to do with each lender. It sounds like you have things pretty set up if you're gearing up for a specific purchase in 2022. I assume you may have a lender already in mind so it might be worth it to speak to them and ask!