In the second installment of “Buy Before You Sell,” we’ll share how a buyer can leverage their 401(k) to get the downpayment needed to purchase before they sell their home (or even if they don’t have a home to sell!).
Having and funding a 401(k) is a smart way to save for the future. But what many people don’t realize is that you can use these funds to help with the purchase of a home. While every borrower should check with their employer on what their specific plan allows, here are some general guidelines:
- A loan against your 401(k) balance will not actually withdraw your funds. It’s a loan secured against your balance and you will have to pay this back at an interest rate and term set by the company’s plan. Typically, you will not incur any federal income penalties to do so.
- A 401(k) loan is not included in the borrower’s debt-to-income ratio. Therefore, it could be more advantageous than a loan secured against a property, which would have to be included in the ratio calculation.
- You can withdraw the funds from your 401(k) account. But again, be mindful as there may be restrictions and penalties involved, especially if you are under the age of 59 ½. However, in 2022, we were able to withdraw up to $10,000 without a penalty.
If leveraging your 401(k) instead of your home’s equity in order to go non-contingent, remember, once the current home is sold, the equity from that can be used to pay off any 401(k) loan balance and can also be used to pay down and re-amortize the new mortgage to a new, lower monthly payment.
Every borrower’s financial strategy can be different and at Key Mortgage, our loan officers can work in conjunction with the borrower’s financial planner or accountant to help provide the options available that are best suited for their individual strategy.
Reach out to a Key Mortgage loan officer today to learn more about this and other options available to help you have more meaningful conversations with your sellers and buyers – which can earn you more business.