Personal Finance

I'm looking to buy a house and was told that I can use my 401k as an asset - is that true?

Rich Duprey

Published: December 19, 2024 10:52 am

Buying a house is one of the biggest, most expensive investments you will make in your lifetime. Getting the process to go right is a major cause of stress, not that the banks make it any easier. The volume of paperwork involved, the amount needed for a down payment and closing costs, and the level of assets needed to prove you are worthy of a loan and can afford the payment is daunting.

Not without reason, though. The median sales price of a new home in October, according to the U.S. Census Bureau, is $437,300. Just a decade ago it was $288,500, while 20 years ago it was $221,000, so prices are accelerating.

The cost of a mortgage isn’t cheap either. Despite the Federal Reserve cutting the federal funds rate beginning in September, mortgage interest rates haven’t fallen as expected. In fact, they’ve gone up. The average contract interest rate for 30-year fixed-rate mortgages with a conforming loan balance increased to 6.75% from 6.67%. When the Fed made its first cut in years on Sept. 19, interest rates stood at 6.09%.

That’s why having your ducks in a row when applying for a mortgage is essential. Delays can cost you money. It’s why a Redditor on the r/Mortgages subreddit wanted to know whether when applying for a mortgage, does a bank use the entire value of his 401(k) when tallying assets or just how much he can withdraw.

24/7 Wall St. Insights:

• A new home is likely going to be the most expensive purchase you ever make, so having all your paperwork in order before beginning is important.
• A 401(k) is certainly a vital asset to be considered in determining your creditworthiness, but the overall impact will vary based upon a number of considerations.
• Speaking with your lender or a financial advisor ahead of time can smooth out any bumps in the road before they become a problem.
• Also: Is your 401(k) optimized for your retirement plans? (Sponsored)

Wandering into the gray zone

Now I’m not a financial planner, so these are just my opinions, but it seems as with everything involved in getting a mortgage, it’s not quite clear cut on what the value a 401(k) lends to the qualification process. Even if you’re not using the retirement program as a source of funds for the down payment, there are a lot of factors that lenders take into consideration.

Of course, a bank or mortgage lender is going to want to verify the balance of the account, but a lot will depend on what type of mortgage you are getting, too. Different mortgage programs (FHA, VA, Conventional) might have different guidelines on how 401(k) assets are treated. For instance, FHA loans might allow for counting a significant portion of your 401(k) as reserves if the guidelines are met.

The lender might also want to know whether you have taken a loan from the 401(k), which could affect your debt-to-income (DTI) ratio. A high DTI can negatively impact your mortgage qualification since it shows you have less disposable income for new debt obligations.

On the other hand, a well-funded 401(k) as part of your financial reserves can be viewed as providing a cushion in case of financial hardship. Lenders may be reassured by a big balance as it indicates you have a backup resource for unforeseen expenses.

Still, because of the significant penalties and taxes associated with a withdrawal from a 401(k) if you are younger than 59-1/2 years old, many lenders might not count your entire 401(k) balance, especially if you’re not near retirement age.

Moreover, if your 401(k) includes employer contributions that are not fully vested, the lender might only consider the vested amount as part of your assets.

Key takeaway

While a 401(k) is seen as an asset, its impact on mortgage qualification can vary based on the lender’s policies, your age, the nature of your contributions, and how the lender assesses your liquidity and future financial stability. 

That’s why it is essential to speak with your mortgage lender or a financial advisor prior to beginning the process to understand exactly how your 401(k) will be factored into your loan application.