Asset documentation is one of the most stressful parts of the mortgage loan process. Having to supply the most recent 2 months of bank statements, and also having to keep providing additional statements every time a new one comes out can be stressful. But the most stress-inducing part is if you have any large deposits that need to be sourced.
However, one of the good things about all of the loan programs in general, is you can use other means to help with making sure you have either your reserves amount met, or to help support your down payment.
Fortunately, in addition to using your bank statements and income information, you can choose to provide your 401k and/or IRA accounts to help show reserves or to directly help cover the down payment for a home. For this blog update, we’ll be discussing the definition of a 401k accounts, some benefits of a 401k account, and how to use the 401k account to help you buy your home.
What is a 401k Account?
A traditional 401 k plan is a retirement plan that is usually put into place with your employer where a percentage of your pay is directly invest into this account before taxes are taken out. You only pay those taxes upon withdrawal of the 401k, as 401k plans are tax deferred. You can kind of think of it as a savings account that you don’t really have access to unless it’s for hardship withdrawals.
A 401k Plan is basically your employer investing a portion of your pay before any tax deductions into specific mutual funds or stocks that you choose within the plan. You have the option to choose how your money is invested, so it’s a good idea to do your homework on the market. Unfortunately, if the stock market crashes, you can lose your 401k if the funds you’ve invested in are affected.
What Are the Benefits of a 401k Account?
Participating in your 401k plan offered by your employer has plenty of benefits, even if you think you can’t afford it. Even by investing 5% of every check, you’re slowly paving the way to having the retirement that you want for the long term. And the biggest factor for how much you’ll have saved for retirement age is time: The sooner you begin, the better!
In addition to having your own contributions, your employer may have matching contribution amounts, up to 100%. This means that for every dollar you invest into your 401k, your employer can also invest up to a dollar.
And additionally, because you’re investing your money pre-tax deductions, when you file your income taxes you use can use the resulting post-tax amount of your paycheck. This can be used as a tactic to get into a lower tax bracket if you’re right on the cusp, for example, and can provide other benefits.
How Can I Use My 401k For Buying A Home?
401k Accounts can be used for several purposes during the home buying process. If the mortgage lender is requesting you to show reserves, or the ability to pay your mortgage in case of unforeseen circumstances like job loss, you can use your 401k to show these funds.
Additionally, you can also opt to use your 401k to cover the down payment of a home as well, as long as it’s allowable by your 401k retirement plan to make that withdrawal. In both of these situations, the underwriter will require the most recent quarterly statement for your 401k, along with the Plan Summary, which will explain the terms of withdrawal.
The underwriter needs the terms of withdrawal information to determine whether or not your plan allows withdrawal of funds, with or without penalty, for the down payment of a home. If you are using your 401k for a down payment, you will also need a copy of the distribution check, and your newest official bank statement that shows the amount going into your account.
Keep in mind that if you choose to have the 401k be used for a down payment on the home, that you will need to make sure your bank statements on file do not have any gaps. This means you’ll need an official transaction history that begins on the day your last official statement ended on, all the way up through the deposit of the 401k funds to show funds are there. As a reminder, your transaction history will need to have the bank logo, a running balance, and be signed and stamped on all pages by your bank teller.