Take a 401k Loan to Make 20% Down Payment?

[JCB1810]

Hello everyone, I’m new here and would greatly appreciate some opinions on my situation.

My husband and I are closing on a new construction home in a little less than two weeks. When we signed the contract to build the home back in March, we were planning for a 10% down payment. We did the loan in my name only because my husband’s credit score was under 700. Because the loan is for a $343k home based on my $55k income only (our combined income is around $145k, but DH’s doesn’t count since he’s not on the loan), our lender came back in April and said the PMI companies had changed their required debt/income ratio, and I now fell outside the acceptable limit. They proposed that we bring a 14% down payment to get me back within the limit. It would eat up most of our emergency fund, but it was doable, so we agreed to put down 14%. We thought everything was fine until a couple weeks ago, when we got another call from the lender saying the PMI companies had once again changed their requirements and, yet again, my debt/income ratio fell outside the acceptable limit. Our lender is currently working with one PMI company to make an exception (4 out of the 5 PMI companies they work with said no), but as our closing date is quickly approaching and we still have no firm answer, I started crunching the numbers to see what it would take to get us to a 20% down payment and avoid PMI altogether. I figured that doing so would deplete our emergency fund and we would need to borrow about $14,500 in a 401k loan to make it happen. My question is, is it worth it taking out a 401k loan to avoid PMI and reduce our monthly payment by $250/month? I know it’s not good to completely drain our emergency fund either, but we have always been aggressive about saving money and staying out of debt, so I feel like we would build it back and pay off the 401k loans pretty quickly.

I look forward to reading your responses!

[creditcardfree]

Moving into a new home with no emergency fund just doesn't seem right. I'm also not a fan of 401k loans.

So, my question to you is: exactly how quickly would you rebuild your emergency fund and repay the 401K loan?

[cptacek]

It might make sense to apply for a loan with both of your incomes, even with his bad score.

[frito833]

The bank perceives a lot of risk on current economic conditions and a 343k mortgage based on a 55k income. Hence, they decrease their risk by increasing the down payment. If it was me, I would focus on being completely debt free, have at least a 6 month emergency fund, and a 20% down payment. The mortgage payment shouldn't exceed 25% of your net pay on a 15y fixed. If this doesn't fit the formula, you either have to buy a cheaper house or save for a bigger down payment.

My question is, if your credit score is high enough, shouldn't it offset your husband's average credit score? 800 + 700 / 2 = 750 credit score. If that's the case, have your husband on the mortgage too. A house is a marital asset anyways.

If you leave the company, you have 60 days to pay back the loan or else you get socked with a 10% tax penalty on top of your income tax rate. You will also miss the returns on your 401k as the market upswings.

Have you funded a ROTH IRA for at least 5 years by chance? Government allows you to take out your contributions up to $10,000 for a first-time home buyer. First-time home buyer meaning you have not owned a home in 2+ years. Hope that helps.

[anonymous_saver]

I 100% do NOT support taking money out of your 401(k) for your home purchase. I think that is one of the worse choices you could make.

How much of an emergency fund do you currently have? How many months would this last in the new home?

I see two options. (1) Include your husband on the loan and qualify more easily for this home with a higher interest rate because of his FICO score, or (2) Get a cheaper home.

I really don't like the idea of using your emergency fund either.

What are both of your FICO scores? That may help us give more specific advice.

[Broken Arrow]

You know, I personally can't see the upside to this either. To me, it just screams, "Don't buy".

However, I also realize that the purchase is still most likely going to go through so....

I would look at the overall monthly budget as well, because it means tacking on that 401(k) loan on top of the mortgage. Is this doable? Without a full budget picture, I don't know.

[DC Metro Crab]

No, it's not worth taking out a loan on your 401k to bypass PMI. It also sounds like there's a good chance PMI will fall through even with a DP of 14%. The numbers are not in your favor since $280k on $55k is a huge red flag as is. If you do end up taking the 401k loan to hit 20%, understand that no matter how frugal you may be afterwards, you are taking a huge risk with no EF. Emergencies wait for no man, and with the increased cost of PITI, how long would it take to replenish? You'll be exposed to a great deal of risk for most likely a long while.

[Ima saver]

I don't see where she has much choice. She is NOT buying a home, she signed a contract to have one built. This is a custom home and she must come down with the down payment that the bank requires. I think she must borrow from the 401 and use the extra $250 a month to pay it back. She can also use the $8000 tax credit to pay it back when she receives it.

[creditcardfree]

She can also use the $8000 tax credit to pay it back when she receives it.

Isn't that only for first time home buyers? I guess we don't know if this is a first home or not.

[JCB1810]

Hi everyone! Thank you all for your responses. More details below…

To answer creditcardfree’s question, I think we could have the 3 month emergency fund replenished and the 401k loans paid back in 8 months, but probably more like a year since we have a baby on the way, need some additional furniture, lawn care items, paint, and that sort of thing.

Cptacek, I wish we still had the option to add my husband to the loan, but the lender told us that the new guidelines also increased the lower limit credit score to 680, and my husband’s is a 669, so he doesn’t qualify. They’re telling us that they don’t average the two credit scores (mine is 766), they just take the lowest. So basically no PMI company that our lender works with us would approve a loan with both of us on it.

Frito, no we hadn’t started a Roth yet. We had just completed Dave Ramsey’s Baby Step 3 (emergency fund) when we decided to start a family and find a bigger home.

Anonymous, we were planning on having a 3 month emergency fund when we moved in, but now none of the options we’re left with will leave us much of anything. The lender says we could do an FHA loan and that would leave us about a 1 month emergency fund.

Broken Arrow, our monthly budget is below. This factors in the 20% down payment and the 401k loans to make it happen. Of course it’s hard to truly gauge what the expenses will be with a baby and we were previously living in a condo (less homeowner responsibilities) that was half the size of the home we’re buying now. We actually chose a pretty modest floor plan compared to others in the community. It’s a 4 bedroom, 3 bath at 2800 square feet. We see this as our home to stay in for a long time, hopefully forever.

Imasaver, I so wish we could use that $8k first time homebuyer’s credit! Unfortunately, I’ve owned a home before. Now my husband technically is a first time homebuyer, but of course my status as a previous homeowner means he’s ineligible and we get screwed out of that too!!

Monthly Take Home: $8610
Expenses:
$1,765 – Mortgage (30 year fixed, includes property tax and HOA dues)
$1,000 - Daycare
$825 – Utilities & bills (electric, gas, water, cable, insurance, cell phone, home security)
$350 – Groceries
$350 – Miscellaneous expenses & limited entertainment
$300 – Gas
$320 – 401k Loan Repayment
$210 – Baby’s college fund
Monthly Surplus: $3,490

For those of you that say “don’t buy”, may I ask why? Is it primarily because of the lack of emergency fund? I feel like we have adequate income to live in this house. We don’t have any consumer debt. In fact, we paid off $54k in student loans, auto loans, and credit card debt, built a 3 month emergency fund, and saved for a 10% down payment in 2 years. We thought we were in good shape going into this house deal, but then the rules started changing in the middle of the game. Now we’re in this stupid pickle!! If we walk away from the house now, we would forfeit at least $2k in deposits and I would hate to lose that and have to start over.

Thoughts?

[simpletron]

this is an alternative, but may not be the best course(would need to see the GFE of both loans to compare)

switch to a FHA loan and add your husband's income. the FHA is more lax about credit scores, so you will qualify. but the mortgage insurance is set up differently from a conventional loan, so it is harder to compare directly. generally for the same downpayment, you'll pay more upfront and have a lower monthly payment with FHA. also sometimes interest rates can be different.

[creditcardfree]

I like that you can pay back everything in a relatively short period of time! That's great. I wouldn't go upgrading everything in the new home until you have that emergency fund back in place. It is so important.

I think it is definitely worth talking to the lender about the FHA. They should be able to run numbers for you and explain the differences. It may cost a little more, but it may be that it keeps your 401K and emergency fund intact. That just may be worth the peace of mind.

Good luck!

[Ima saver]

If you have a surplus of $3400 you should be in pretty good shape to pay back the 401 and build your emergency fund back up. Sorry you don't qualify for the $8000 credit. Since this is a brand new home, you won't be needing any upgrades for a while.

[MonkeyMama]

I disagree with the upgrade advice. Builder upgrades tend to be far cheaper than future remodels. (Whereas going "standard" on anything means you have to replace it tomorrow). If you are closing in 2 weeks, you probably chose your upgrades long ago, anyway. Kind of moot.

I would NOT do the 401k loan, if at all possible.

I would shop around and try to get your dh on the loan. Have you only talked to one lender? Seems like, in this market, the ball is in your court, overall (even if switching lenders delays the purchase). Call some other lenders - someone can probably help you.

[wincrasher]

Hey, don't give up on the first time credit so easily!

As with all things, there are rules and loopholes. First time homebuyer is defined as not owning a home in the last 3 years.

One of my co-workers is buying a first home with her boyfriend (they should get married, but that is too old-school I guess) - since they are unmarried, but buying the house jointly, they both qualify for the credit - so they are getting $16k together. Who would have thought?

You are taking on alot all at once. You will spend ALOT of money setting up your new home. Tread carefully and good luck.