A 401(k) loan is not considered in your DTI ratio, as your 401(k) is an asset of yours, not money on loan from another source. While incredibly unwise to take a 401(k) loan out (see second paragraph for a litany of reasons that is by no means comprehensive), It is the equivalent of "Borrowing" funds from an existing account under your control (albeit with stricter rules). 401(k) loans will, however, reduce what is considered to be your disposable income (for purposes like repaying student loans on an income based plan, and maximum mortgage size qualification). Show
401(k) loans are some of the singularly most expensive loans a person can take, as you lose out on not only the current interest from the account, but also potential future interest (40 years of growth compounding at an average of 7.5% post-inflation adjustment is ~$18 for every dollar loaned out). Additionally, many plans do not allow ongoing contributions with an outstanding loan (forgoing company match which is a guaranteed return of that % per dollar). In the USA, 401(k) loans must be repaid no later than 90 days from termination of employment (some plans restrict this even further, to 60 days, 30 days, or even immediately). Unexpected job loss makes this type of loan much riskier than it would seem at the outset. finally, 401(k) accounts have a maximum annual contribution limit (see IRS guidelines for the particular years limit, 2019 is $19,000 plus $10,000 catch up for those 55 years old and older) meaning that each year you do not max out, and each year that has less than optimal growth, is a year that underutilizes your 401(k) and the tax benefits it provides. A quick search on the internet brought up several resources pointing to a 401(k) loan not impacting DTI. This being one. Buying a Home / Can I use a 401K loan as part of my down payment? If so, will I have to factor in the payment I need to make to repay my 401k in my debt ratio? Loans / Can I use a 401K loan as part of my down payment? If so, will I have to factor in the payment I need to make to repay my 401k in my debt ratio? Loans / Non Conventional Loans / Can I use a 401K loan as part of my down payment? If so, will I have to factor in the payment I need to make to repay my 401k in my debt ratio? Can I use a 401K loan as part of my down payment? If so, will I have to factor in the payment I need to make to repay my 401k in my debt ratio?This is an incredibly common question, especially from first time homebuyers. Because the money needed for a down payment is not always easy to come by, lenders of all types allow borrowers to apply money from a 401K loan to their down payment and closing costs. While taking out a loan from your 401K may seem counterintuitive, because ideally you’ll have to pay this back, most lenders will not factor this eventual payment into your debt-to-income ratio. See below:
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June 28, 2013 Here’s a not-so-common question about FHA loans, but one that’s important for many borrowers considering their options in this area: “I borrowed funds from a 401(k) to refinance my home. My lender says this monthly payment would be counted when computing my debt to income ratio. According to the FHA, the following list of financial obligations should not be used to calculate the debt to income ratio: other retirement contributions, such as 401(k) accounts (including repayment of debt secured by these funds). Do these rules still apply?” The FHA does maintain a set of guidelines on how the lender should view a 401K when it comes to calculating the debt-to-income ratio. According to the FHA loan rules found in HUD 4155.1: “Obligations not considered debt, and therefore not subtracted from gross income, include: - Federal, state, and local taxes The rulebook also says the following: “Up to 60% of the value of assets such as Individual Retirement Accounts (IRA), thrift savings plans, 401(k) and Keogh accounts may be included in the underwriting analysis, unless the borrower provides conclusive evidence that a higher percentage may be withdrawn, after subtracting any - Federal income tax, and FHA loan rules say redemption evidence is required by the lender, and the portion of the 401K not used to meet closing requirements can be considered cash reserves. The portion of the question worth paying special attention to concerns paying back the money withdrawn from the 401K. The lender may be interpreting the new need to pay back the funds to her 401K as a recurring debt. In these cases, ask as early as possible about lender standards in situations like these. A participating FHA lender may have more strict standards in such areas than the FHA minimums or basic guidelines as mentioned in the rules printed here. FHA loan rules included minimum requirements and standards, but in many cases the lender may have higher requirements than the FHA minimum. This is permitted by FHA loan rules as long as such requirements meet Fair Housing standards, but in general credit and debt-to-income regulations set by the FHA may not be the final word on the matter. The lender’s own requirements also play a role. Talk to your loan officer to learn more about the lender’s requirements in this area.  Browse Questions About Mortgage TopicsSEE YOUR CREDIT SCORES From All 3 BureausDo you know what's on your credit report? Learn what your score means. Do 401k loans affect DTI?Borrowing From Your 401k Doesn't Count Against Your DTI
Even though the 401k loan is a new monthly obligation, lenders don't count that obligation against you when analyzing your debt-to-income ratio. The lender does not consider the payment the same way as it would a car payment or student loan payment.
Do mortgage lenders consider 401k?Is my 401(k) an asset? 401(k)s are nonphysical assets and your lender will likely take them into consideration when assessing your mortgage application. Be sure to consult with a financial advisor to make sure there won't be negative consequences if you use your 401(k) to buy a house.
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Does a 401k loan count against debt to income ratio
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