401k loans are not reported to any credit bureaus and would not impact your approval with a lender. In my experience I have never seen a 401k loan impact anything. Usually people are calling asking for their statements before they go to the lender for their official estimate.
401K loans are not reported to the credit bureaus. You may want to talk to your financial adviser however before taking a 401K loan to ensure there are no other ramifications.
Will your employer know if you take out a 401(k) loan? Yes, it's likely your employer will know about any loan from their own sponsored plan. You may need to go through the human resources (HR) department to request the loan and you'd pay it back through payroll deductions, which they'd also be aware of.
You may not get approved: Those nearing retirement may be considered “higher risk” and thus denied a 401(k) loan because payments will no longer automatically come out of their paychecks.
The application process for a 401(k) loan is typically quick and easy. Most plans even allow you to apply online. Receive the funds. Provided your application is approved, you'll receive the money from your plan administrator by check or direct deposit.
All the positives still apply plus the repayment time frame is usually longer. On the downside, though, borrowers would not receive tax deductions for the interest paid on the loans the way they would with other forms of credit and the impact of an even longer-term loan on retirement goals would be compounded.
Immediate supervisors or colleagues are unlikely to have direct access to this information, maintaining a level of privacy for employees. According to the rules and regulations established by the employer, the confidentiality of 401k loan information is maintained to protect the privacy of employees.
Although you generally have up to five years to repay a 401(k) loan, leaving your job (or losing it) before the loan is repaid may mean you have to pay back what you owe quickly. If you can't, the loan will go into default and the unpaid balance is considered a distribution (referred to as the loan offset amount).
On an institutional level, your employer has access to these records. This means that every withdrawal from an employee 401(k), including loans and hardship withdrawals, can be known by certain company employees.
The Upsides Unlike traditional bank loans, 401(k) loans can be approved and processed within a few days—after all, you're essentially lending money to yourself. That means you don't have to wait weeks to access the funds.
A low credit score won't result in a rejected application. Moreover, a 401(k) loan won't affect your credit at all — even if you default on it. Low interest rates. You'll pay a modest interest rate and this money goes straight into your retirement account.
Since the 401(k) loan isn't technically a debt—you're withdrawing your own money, after all—it doesn't impact your debt-to-income ratio or your credit score, two big factors that influence lenders.
When trying to determine whether you have the means to pay off the loan, the underwriter will review your employment, income, debt and assets. They'll look at your savings, checking, 401k and IRA accounts, tax returns and other records of income, as well as your debt-to-income ratio.
Since the 401(k) loan isn't technically a debt — you're withdrawing your own money, after all—it has no effect on either your debt-to-income ratio or your credit score, both of which are major factors that lenders consider.
Using a 401(k) to pay off a mortgage might make more sense for those nearing retirement and wanting to simplify their finances. You must keep in mind the 10% early withdrawal penalty if you're under 59½ and the potential impact on your retirement income. Carefully weigh the benefits and risks before making a decision.
Deferring Social Security payments, rolling over old 401(k)s, setting up IRAs to avoid the mandatory 20% federal income tax, and keeping your capital gains taxes low are among the best strategies for reducing taxes on your 401(k) withdrawal.
If you don't repay the loan, including interest, according to the loan's terms, any unpaid amounts become a plan distribution to you. Your plan may even require you to repay the loan in full if you leave your job.
With a hardship withdrawal, you can take money out of your 401k without penalty if you're facing an immediate and heavy financial need, such as medical bills or a job loss. However, you'll still need to pay taxes on the amount you withdraw, and you may be required to show proof of the hardship.
Although a 401(k) is a debt obligation, most lenders do not consider this obligation when determining your debt-to-income ratio.
Rules of taking out a 401(k) loan are as follows:
There is a 12 month "look back" period, which means you can borrow up to 50% of your total vested balance of all accounts you owned for the last 12 months, reduced by the highest outstanding balance over this look back period.
If times get tough and you're not able to repay the loan in time, it will be counted as a withdrawal from your retirement savings. You'll have to pay income tax on the money, plus a ten percent penalty for early withdrawal if you are under age 59½ and the withdrawal did not qualify for an exception.
401(k) Loan Pros
You may be able to qualify for a lower interest rate than you could with a credit card or personal loan. You're paying interest back to yourself, rather than to a bank or lender. There's no credit check required and a 401(k) loan won't show up on your credit report.
Loans are not taxable distributions unless they fail to satisfy the plan loan rules of the regulations with respect to amount, duration and repayment terms, as described above. In addition, a loan that is not paid back according to the repayment terms is treated as a distribution from the plan and is taxable as such.
The short answer: It depends. If debt causes daily stress, you may consider drastic debt payoff plans. Knowing that early withdrawal from your 401(k) could cost you in extra taxes and fees, it's important to assess your financial situation and run some calculations first.