We often have borrowers who have both very high debt ratios and tight cash situations. Such borrowers often ignore a great source of additional funds for both down payments and closing costs: 401K Loans, or money borrowed against one’s 401K/Retirement account.
401K loans are deemed “seasoned funds” even if the loan proceeds hit the borrower’s account 2 weeks before close or escrow (an all too common occurrence). In addition, many lenders do not count the 401K loan payments against a borrower’s debt ratios.
Most employers allow employees to borrow up to 50% of their 401K’s value. These loans can be paid back in terms ranging from 5 to 15 years, with rates currently in the 4% to 5% range.
Note also that 401K loan repayments are paid back to the employees/borrowers themselves; borrowers are repaying themselves. This is why lenders do not count such loans against debt ratios. This is another reason why 401K loans are good idea – borrowers earn a return from themselves as opposed to paying someone else interest income for borrowed funds.
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