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Retirement Plan 401(k)

Will a Loan on My 401(k) Impact My Mortgage?

An 401(k) loan doesn’t affect the terms of your mortgage.

By Matt Ryan Webber

Updated August 11, 2022

Facts verified by Amanda Jackson

If you need to access some of the money that you’ve put into your 401(k) it is possible to take advantage of a temporary loan which you’ll repay using money taken from your earnings. The borrowing option from your 401(k) is often the best option to access funds than using higher interest loans such as the title loans, payday loans, or even personal loans.

If you’re considering a 401(k) loan, you may be wondering how it might affect other debts such as your mortgage. The answer is simple: it won’t. Whether you are qualifying as a homeowner or paying down, the 401(k) will not affect your other loans.

In this article, we’ll go over how 401(k) loans work and give you the pros and cons to consider.

Key Takeaways

A 401(k) loan can provide an opportunity to access your account’s money for liquidity in the short term.

401(k) loans also have no impact on your mortgage regardless of whether it’s your current mortgage or one you are seeking.

It is possible to use a 401(k) loan for a variety of purposes like a down payment on an investment property.

Try to repay your 401(k) loan quickly. The longer it takes you to pay back the loan the more likely you’ll miss out on the potential accrued interest.

401(k) Mortgages and loans

An 401(k) loan has both advantages and disadvantages that you should consider. If used responsibly it could be a simple method to get money to meet immediate expenses. However, taking funds out of your retirement account could be detrimental to the long-term performance of your investment portfolio. The longer your funds are not invested, the more you miss out on the potential that compound interest offers.

A 401(k) loan has interest which is paid into your account, however it is not the involvement of a lender or an examination of credit histories. Under the law, you are able to take out loans up to the lesser of $50, or greater of either $10,000 or 50% of your account value.1

The receipt of the loan via your 401(k) will not be a taxable event unless the loan restrictions and repayment rules are not followed. The loan will not impact your credit score and has no affect upon your home mortgage. It will not impact the rates and terms of your current mortgage nor play a role in the process of applying for a new mortgage.2

In fact, you can take out a 401(k) loan to use as a down payment for the purchase of a house.

401(k) loans will not influence your mortgage. They allow you to access the funds you have saved up to meet urgent requirements. You are only obligated to pay back the loan in order to keep your tax advantages and avoid penalties.

401(k) Credits and Real Estate

It is possible to make use of the 401(k) loan to finance the purchase of real estate. Actually, the guidelines regarding 401(k) loans are different when you use the loan to buy a house.

The norm is for 401(k) loans to be paid back on an amortized schedule, or with fixed repayment dates with regular installments with a minimum of five years. If it is the case that the loan is used to purchase a primary home, the repayment time could be extended. Your plan administrator sets the guidelines for how long.2

However, it seldom makes sense to use the 401(k) loan to completely finance a residential purchase, because in most circumstances, a regular mortgage loan will offer more financial benefits. For one, you cannot be able to deduct the interest you pay from 401(k) loans as you are able to with mortgage interest. Additionally, borrowing funds out of your 401(k) for long enough to repay a house could significantly decrease your investment’s value over the long run.

Another way the 401(k) loan can play an important role in the purchase of real estate is when you use the funds to cover the closing or down payment expenses. Since that the 401(k) loan isn’t technically a debt—you’re withdrawing your own money in the end—it doesn’t have any effect on either your debt-to-income ratio or your credit score, which are crucial factors lenders take into consideration.

Can a loan to my 401(k) impact my mortgage?

A 401(k) loan will not influence your mortgage application. It is not a factor in your mortgage application. 401(k) loan has no impact on your debt-to-income ratio or your credit score, which are two of the major variables that influence mortgage lenders. In fact, some home buyers utilize 401(k) loan funds as a down payment on a home.

Are 401(k) loans a good idea?

The 401(k) loan has upsides and disadvantages that you should consider. If it’s a good option for you is contingent on many factors about your personal financial situation. These loans can provide a good source of cash at a low cost for urgent needs. However, they could reduce the worth of your retirement account in the event that you fail to make timely repayments.

Can I use an 401(k) loan for a down amount?

You may use a 401(k) loan for a down amount, and this won’t affect your debt-to-income ratio. Just make sure that you are able to pay off your 401(k) account in a timely manner. The longer you wait to repay your loan the more likely you’ll be unable to benefit from the potential to compound your interest.

The Bottom Line

In some instances the use of the 401(k) loan can be an excellent way to gain access to short-term liquidity. 401(k) loans also have no impact on your mortgage. In fact, taking out the 401(k) loan can be a good way of raising a down payment for the purchase of a house. Remember that one of the drawbacks of this loans can be that they remove money from your investment, so you can miss out on the power of compounding your investment until you pay the loan.

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