Should I withdraw money from my 401(k) to pay off a loan, so I can proceed with obtaining a mortgage?
I was told a week prior to our scheduled closing on our new home that we need to get our DTI% down 6%. In order to do this, we would need to pay off our car loan of $12,700. (The resale of the car is approximately $9,000) The only way we could do this would be to take that amount from my 401(k), on top of the amount we are already liquidating for the down payment. Is this an advisable strategy? It is either this option or we will risk losing out on the new house.
Unfortunately, it sounds like the house you are looking at buying is a bit outside your range of affordability. While technically you could withdrawal money from your 401(k) or borrow against it, you should not in this scenario. I would recommend that you continue to keep your lifestyle at a modest level until you can afford a healthy down payment for your home, without sacrificing your emergency fund. Too many people enter a situation like yours because their emotional attachment to a home drives them to purchase too much house too quickly and it can put unneeded strains on them in the future, such as the need to replace a furnace, or some other large home expense. Save yourself the hassle and keep renting so you can pay down debt and establish an emergency fund with 6-12 months of expenses. I promise you will thank yourself in 10-15 years.
Taking money from your 401(k) could be a costly mistake. If the 401(k) is at a current employer, then your option is a loan. If you leave the company, the loan is due within 30 to 60 days. If the 401(k) is from a previous employer, then the income taxes and possible penalty could more than 40%.
Think twice and maybe the house is outside of your current range.
Kimberly J Howard, CFP
As mentioned elsewhere, the big takeaway here is that you probably should not be buying this home if purchasing it destroys your liquidity to the extent that you cannot access $12,000 by any means other than tapping into your 401(k), which you have already depleted in order to make the down payment.
You sound like you are biting off more than you can chew. Losing out on the new house could well be a financial blessing.
If your 401(k) is the only place you can get money from to make the home purchase happen, then you have to ask yourself if the home purchase is the right decision.
Also bear in mind, the most you can take from your 401(k) is the lesser of $50,000 or 50% of the account balance. If you have already exceeded that, you may not be able to take out more.
I do understand from working with clients over the last 25+ years how emotional a home purchase can be. However, bear in mind that you really don't retire on the value of your home, but rather on the assets you accumulate during your life to provide an income stream that needs to last for you and your spouse.
One option is to buy a less expensive house. You can always trade up down the road if your income increases and your financial situation gets stronger.
Rick Fingerman, CFP
Unless you are way head saving for retirment this is a terrible idea. You will pay taxes, and a 10% penalty to pull the money out, not to mention what that will do to your chances of achieving financial serucrity later in life.
You can get a loan for a house but not for retirement. Think long and hard about this. Sounds like you were already planning on pull the down payment from you retirement accounts.
Here are some tips to truly get ready to buy a home that you can afford:
Smart Home Buyers before moving any further, answer a few questions, and be honest with yourself:
– “How is my credit?”
– “Do I have a reliable income?”
– “Where is the down payment going to come from?”
– “What am I willing to give up to make my mortgage payment?”
As a simple rule of thumb for Smart Home Buyers:
Payment on your home/rental/house should be around 25% or less of your income. Use sites like www.mortgagecalculator.com to estimate what your payment would be. Although you may qualify for a loan at 50% of your income or even higher, can you really afford that? It’s unlikely.
To get a rough but useful calculation of expenses, enter purchase price, take off the down payment, while estimating the property taxes. You may be surprised by the cost of what you want to buy.
If you’re pre-approved, then that gives an idea of the size of loan you may qualify for. The next step is to figure out the difference between what the mortgage payment costs (plus home-owners association, home insurance, property taxes) and what you are paying on your current home. You should consider saving the difference between your current payment and new payment for at least six months to help decide if you can adequately cover the new higher housing expenses.
If you are having trouble doing this, what are you willing to give up to make the new mortgage payments? Are you willing to cut back on travel? Going out? Dinners with friends? Is this too much to give up? If so, you may need to find a cheaper property, or save for a larger down payment.
Hope this helps,
DAVID RAE, CFP® is a retirement planning specialist with DRM Wealth Management, specializing in the needs of friends of the LGBT community. His is also a regular contributor to the Advocate Magazine, Huffington Post as well as regularly appearing on various News Shows. for more visit www.davidraefp.com