If you are buying a home and have a large portion of your assets in a retirement account like a 401K, 403B, or other retirement product or annuity, you may decide to use those funds to make a down payment on your new home. This is becoming an increasingly popular choice. Like brokerage accounts and bank checking, savings, and money market accounts, most popular retirement accounts are assets that can be counted toward your "reserves." Reserves are a measure used by mortgage lenders to figure out how many months of payments you need to have in order to cover payments you might miss if your income were to stop. Most popular retirement accounts qualify as assets that can be counted toward your "reserves."
Most of the time, your employer manages or sponsors your retirement accounts, such as 401(k) or 403(b) annuity accounts. Your 401K or 403B account is a great way to keep track of your earnings and savings, and it can also be used in a number of ways to help pay for your new home. Depending on the rules for your account, you may be able to withdraw money directly from the account or "borrow" money (using your own money) in the form of a loan that you pay back at a low rate of interest. Whether you take money out of your account or get a loan against it, be sure to document every detail of the transaction. This includes any paperwork for the withdrawal or loan, as well as demand draughts, cashier's checks, deposit tickets, etc., so that your lender can see that the money came from this source.
Lenders do treat money from retirement accounts for a down payment in different ways depending on the programme, the state, and sometimes even the specific case. In particular, borrowing money in the form of a loan may increase what the lender sees as your monthly debt obligations. This is because even if you borrow money from your own account, you still have to make a payment every month that you wouldn't have to make otherwise. Lenders often see this as bad for your qualifying DTI, or Debt to Income Ratio, which makes it harder to borrow as much money as you may need. On the other hand, cashing out any type of retirement account will always create a taxable event and sometimes also a penalty fee, which is usually more than the nominal interest rate common to the loan option. Talk to your loan officer about the requirements of your specific programme and weigh your options with him or her or another trusted financial professional.
You could also talk to your employer about any down payment assistance programmes that might be part of your benefits package. These can come in many different forms, but it's important to make sure with your employer that any help with a down payment is not a loan and that you don't have to pay it back. Why would your boss want to help you come up with a down payment? Call them old-fashioned, but most companies want their employees to stay with them. How would you feel about your company if they helped you buy your dream home? As with a 401K, 403B, or other retirement account, your employer's help with a down payment should be well-documented. You should keep all copies of communication, checks, deposit tickets, and account statements, as well as signed records saying that the money is given freely and doesn't need to be paid back.
