Retirement Funds, 401K, & IRA Accounts:
Their Use in Real Estate Purchases
There are several ways buyers can "fund" their home or investment property purchase beyond those funds they've built up via their savings accounts ...
As a potential home buyer, it's always important to discover and thoroughly investigate all options at your disposal. Finding and working with a good loan officer makes a big difference in this regard.
An experienced knowledgeable LO will do their homework and then present you with a menu of available options. Then they'll help you weigh the pros and cons of each as they pertain to you and your future plans.
Now it's important to first point out:
"Low or NO Down Payment" mortgage programs exist. And they certainly can help ease the need for large savings and down payments.
Some examples of those helpful mortgage programs are:
- VA Loans
- FHA Loans
- Home Ready Program (Fannie Mae)
- Home Possible/Home One Programs (Freddie Mac)
- USDA Loans
- IHDA * (100% Financing. Income Limits Apply. Funding is limited. Restrictions are also in place and apply. * Illinois Housing Development Authority. Can be used for the purchase of IL properties only.)
And it's also important to add: Beyond those mortgage programs mentioned above, help can be available to buyers/borrowers via the following methods.
- Down Payment Gifts
- Sellers Assistance
- Down Payment Assistance Programs
- IRA Withdrawals
- 401k Loans/Withdrawals
- More ...
But I'm going to focus in this post on 401k and IRA (Individual Retirement Accounts), where an account holder has "access" to their retirement funds before their retirements take place ...
There are several ways that an employee with a 401K or IRA can get to their funds if they're a hopeful buyer. Those range from a loan against the balance of the account ... to an outright withdrawal of money.
No matter the method of access: It's vitally important that each account holder/borrower know or learn the specifics of their own retirement plans/funds. Each 401k or IRA plan can have different rules for loans and withdrawals. I highly recommend, if you are considering either action, that you speak with your plan's administrator prior to moving forward.
Of special note, if you're buying a first home: In these instances, there are often specific provisions attached for that purpose. Many plans allow an individual to withdraw funds without penalties for their home purchase. It's wise to check with your administrator to see if that beneficial option exists for your first home purchase.
Also, know that: One's longevity with their employer may dictate if funds are available to be borrowed or withdrawn.
If a provision of this nature exists, it's referred to as the "Vesting Period". It speaks to the number of years an employee is required to be in the company's retirement plan prior to being eligible to withdraw or obtain a loan on retirement funds.
Included in most (not all) cases: An employee can typically borrow up to 50% of the TOTAL Balance of their account. The funds can then be repaid* back into the same account via a payroll deduction made over a set period of time, usually 5 years. *That "re-payment" of funds is NOT considered a monthly debt in most loan scenarios, note all the qualifiers for these actions.
As you can tell from my paragraph above, rules, regulations, and asterisks abound regarding 401K and IRA loans and withdrawals. And again, that is why I so strongly urge all my borrowers to have a conversation with their plan's administrator prior to making any decision to tap their funds.
All financial options should be presented, considered, and weighed by a borrower when hoping to buy. But when retirement funds are being considered for use in a home purchase/financing, it's especially important that a careful review of account guidelines and rules be conducted and thoroughly understood.
For those considering the use of retirement funds for an investment property purchase, there may be special rules for them at play within their retirement plans. Those I see most often are:
- Age of the Account Holder
- Rate of Returns
- Rules for accessing funds
- Special "terms" for gaining access (Loan or Withdrawal) to down payment funds by those purchasing an Investment Property
The use of retirement funds can be a very reliable and acceptable resource for funding a real estate purchase, for home or investment property. But please ... protect yourself and your financial future.
Take the time to fully-educate yourself prior to taking any action. Consult your plan's administrator and your New Lenox - Will County - Chicagoland/IL - WI loan officer for information and advice along the way ...
* Looking for mortgage financing answers, options, solutions, and experienced assistance?
Are you hoping to Buy, Refinance or purchase an Investment Property in New Lenox, Will County, or elsewhere in the Chicagoland - IL - WI area?
Contact me! I'll put my 40+ years of Mortgage experience and expertise hard to work on your behalf.
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