Generally, no. Mortgage lenders may acknowledge that you have a 401(k) loan but they don't necessarily treat it as a debt the same way they would credit card payments or loan payments. That's because you're paying back yourself, rather than a lender or creditor.
Since the 401(k) loan isn't technically a debt—you're withdrawing your own money, after all—it has no effect on your debt-to-income ratio or on your credit score, two big factors that influence lenders.
It doesn't count toward your debt-to-income ratio, and it won't be counted by credit bureaus. So, taking a 401(k) loan won't hurt your credit score and won't affect your odds of qualifying for a mortgage. The maximum amount allowed to be withdrawn in a 401(k) loan is $50,000.
Answer: No. Loans from your 401k are not reported to the credit-reporting agencies, but if you are applying for a mortgage, lenders will ask you if you have such loans and they will count the loan as debt.
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.
Retirement accounts
The reason is simple: The lender is considering the value of those accounts in the case that you have to liquidate them to pay your bills. You would be subject to early withdrawal penalties, as well as potential fluctuations in value based on market conditions.
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.
Usually, a 401(k) loan has more favorable terms than a regular bank loan, and it is a good alternative if you do not want to withdraw your retirement money. If you are currently paying off a 401(k) loan, you can choose to pay off the outstanding loan balance earlier than the allowed loan term.
A 401(k) loan does not affect your credit score or debt-to-income ratio, since you are borrowing against your retirement money.
It doesn't matter if you leave voluntarily or you are terminated. You have to pay back the 401(k) loan in full. Under the Tax Cuts and Jobs Act (TCJA) passed in 2017, 401(k) loan borrowers have until the due date of your tax return to pay it back. Prior to this, loan borrowers had 60 days to pay it back.
FHA: You are allowed to use a 401K loan. You do not have to factor the payment in to your debt ratio. USDA: You are allowed to use a 401K loan. You do not have to factor the payment in to your debt ratio.
The interest rate on 401(k) loans tends to be relatively low, perhaps one or two points above the prime rate, which is less than many consumers would pay for a personal loan. Also, unlike a traditional loan, the interest doesn't go to the bank or another commercial lender, it goes to you.
Remember, you'll have to pay that borrowed money back, plus interest, within 5 years of taking your loan, in most cases. Your plan's rules will also set a maximum number of loans you may have outstanding from your plan. You may also need consent from your spouse/domestic partner to take a loan.
A 401(k) loan has some key disadvantages, however. While you'll pay yourself back, one major drawback is you're still removing money from your retirement account that is growing tax-free. And the less money in your plan, the less money that grows over time.
If you are unable to pay the outstanding balance within the required period, you can opt to default on the loan, and the outstanding 401(k) loan will be converted into a 401(k) withdrawal.
Key Takeaways. The debt-to-income (DTI) ratio measures the amount of income a person or organization generates in order to service a debt. A DTI of 43% is typically the highest ratio a borrower can have and still get qualified for a mortgage, but lenders generally seek ratios of no more than 36%.
FHA loans are mortgages backed by the U.S. Federal Housing Administration. FHA loans have more lenient credit score requirements. The maximum DTI for FHA loans is 57%, although it's decided on a case-by-case basis.
There may be early withdrawal penalties
Since you contribute pre-tax money to a traditional 401(k), you'll owe income taxes on any withdrawn money. However, if you make an early withdrawal from your 401(k) -- which is before the age of 59 ½ -- you'll likely be subjected to an additional 10% early distribution tax.
The hardship withdrawal option allows first-time home buyers to withdraw $10,000 from their 401k without incurring the 10% IRS penalty. However, buyers will have to pay income tax on this withdrawal come tax season.
Your 401(k) loan isn't technically a debt, so it has no effect on your debt-to-income ratio. Your DTI is the total of all your other debts, divided by your monthly income. It includes your mortgage, home equity loans, car loans, credit card balances, student loans and lines of credit.
If you don't repay, you're in default, and the remaining loan balance is considered a withdrawal. Income taxes are due on the full amount. And if you're younger than 59½, you may owe the 10 percent early withdrawal penalty as well. If this should happen, you could find your retirement savings substantially drained.
401(k) and IRA Withdrawals for COVID Reasons
Section 2022 of the CARES Act allows people to take up to $100,000 out of a retirement plan without incurring the 10% penalty. This includes both workplace plans, like a 401(k) or 403(b), and individual plans, like an IRA.
Most lenders consider pension, Social Security and investment income as your regular income. You may also be able to include your annuity, survivor or spousal benefits and retirement account income as long as you can prove it'll continue for at least 3 years. Your assets can contribute to your ability to get a loan.
Taking money from your 401(k), either via a loan or withdrawal, doesn't affect your credit. What's more, taking money from your IRA or other retirement accounts, has no bearing on your credit or credit score.
A 45% debt ratio is about the highest ratio you can have and still qualify for a mortgage.