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Old 01-15-2012, 04:02 PM
 
Location: Greater NYC
2,907 posts, read 4,921,084 times
Reputation: 3872

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I am considering cashing in two of our smaller 401K accounts to pay down a stagnant credit card balance prior to pre-approval and house hunting next month. The total cash amount (after penalty and taxes) could be 11K-14K and would be deposited in our bank account prior to being transferred to our credit card to pay down the balance.

I want to know if the deposits even though they'll likely only be in our account for a couple of days are going to cause more trouble than it's worth with the lender 'investigating" them. What's the appetite of lenders for deposits and withdrawals of this size nowadays?

A few things:
No lectures please on cashing in 401Ks we have many more investment accounts with substantial balances. We've considered the trade-offs

We will have 20% down.

Credit rating between good-excellent pulling report and rating shortly.

(Yes, we've had credit card debt and had excellent credit scores and received excellent rates to buy our previous home.)

Will these deposits be a red flag to lenders and cause delay the in underwriting of our loan? Should we wait until after closing to make these transactions even if the pay down could bring our score up even higher for the absolute best rates? TIA.
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Old 01-15-2012, 09:28 PM
 
28,441 posts, read 71,005,190 times
Reputation: 18395
If you have "good - excellent" credit (which I would suggest is greater than 740 FICO...) I would not give any consideration to "improving my credit score" as the rate won't move lower . The "magic number for most lenders is not a "perfect score" of (850) but anything north of 700 -- get up to 740 and even picky lenders just can't afford to cut borrower's rates...
That said your total debt will impact how much you can buy. Thus if what you are really trying to do is increase the amount you could spend on a house / borrow AND you've done the math on the PENALTY of cashing out a 401k (which almost certainly would not apply if you decided to directly put the cash toward your home purchase vs incurring a needless taxable event) then go ahead and waste your money on IRS fines instead of using your saved up money for a home purchase... If you want to avoid the penalty just use the money as additional loan for your home purchase -- 401khelpcenter.com - 401k Plan Loan and Withdrawal

As to the "red flag for underwriters" question there is little reason to think that lenders will want to see transactions history that might include the MONTHS before the closing. If you are not going to start shopping for a while the smart thing to do might be to start talking to lenders NOW. The honest mortgage brokers with experience ought to be able to give you a nice run down of the "rate benefit" (which as I stated above is likely non-existent) OR for the smartest way to increase the amount you have to use towards the house. As part of the "honesty check" I would also ask them to give you a run down of the value and "time to pay back" of using some of the wad to "buy down the rate". My guess is that smartest thing to do is triple check your overall retirement plan... (I won't lecture you because lord knows I have a crummy 401k with fund choices that seem to be "all bad", but then at least I would not be flushing my down into the IRS penalty and fine and porta potty..)

Last point -- what do you mean "stagnant credit card balance"??? Are you "current" on these accounts? If you are making minimum payments that are a signficant portion of the available credit on this account then it is "active credit", even if you've "cut up the card" you could start using it and (in the eyes of the lender and credit rating bureau) that will reduce the amout you should be allowed to borrow / lower your credit score. Do also have "non-stagnant" revolving credit that you are actively using? What sorts of balances as a percentage of income do you have? What is your overall debt to income ratio? I am sorta confused how / why someone with "many more investment accounts with substantial balances" has a situation where penalties and taxes make sense to consider...
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Old 01-16-2012, 08:42 AM
 
Location: Greater NYC
2,907 posts, read 4,921,084 times
Reputation: 3872
Quote:
Originally Posted by chet everett View Post
If you have "good - excellent" credit (which I would suggest is greater than 740 FICO...) I would not give any consideration to "improving my credit score" as the rate won't move lower . The "magic number for most lenders is not a "perfect score" of (850) but anything north of 700 -- get up to 740 and even picky lenders just can't afford to cut borrower's rates...
That said your total debt will impact how much you can buy. Thus if what you are really trying to do is increase the amount you could spend on a house / borrow AND you've done the math on the PENALTY of cashing out a 401k (which almost certainly would not apply if you decided to directly put the cash toward your home purchase vs incurring a needless taxable event) then go ahead and waste your money on IRS fines instead of using your saved up money for a home purchase... If you want to avoid the penalty just use the money as additional loan for your home purchase -- 401khelpcenter.com - 401k Plan Loan and Withdrawal

As to the "red flag for underwriters" question there is little reason to think that lenders will want to see transactions history that might include the MONTHS before the closing. If you are not going to start shopping for a while the smart thing to do might be to start talking to lenders NOW. The honest mortgage brokers with experience ought to be able to give you a nice run down of the "rate benefit" (which as I stated above is likely non-existent) OR for the smartest way to increase the amount you have to use towards the house. As part of the "honesty check" I would also ask them to give you a run down of the value and "time to pay back" of using some of the wad to "buy down the rate". My guess is that smartest thing to do is triple check your overall retirement plan... (I won't lecture you because lord knows I have a crummy 401k with fund choices that seem to be "all bad", but then at least I would not be flushing my down into the IRS penalty and fine and porta potty..)

Last point -- what do you mean "stagnant credit card balance"??? Are you "current" on these accounts? If you are making minimum payments that are a signficant portion of the available credit on this account then it is "active credit", even if you've "cut up the card" you could start using it and (in the eyes of the lender and credit rating bureau) that will reduce the amout you should be allowed to borrow / lower your credit score. Do also have "non-stagnant" revolving credit that you are actively using? What sorts of balances as a percentage of income do you have? What is your overall debt to income ratio? I am sorta confused how / why someone with "many more investment accounts with substantial balances" has a situation where penalties and taxes make sense to consider...
Chet, congrats on your second place finish in the CD informative poster contest!

Thanks very much for taking the time to provide me some good insight, I really appreciate it.

I should have been clearer when I said "stagnate" credit card debt, (poor choice of words). What I meant is our balance is NOT increasing and we are paying it down monthly by considerably more than the minimum payment, but, not by large chunks of money. After running numbers, we felt it best to cash out a couple of our 401K accounts to throw a BIG chunk at the balance, (yes, penalties and taxes worth it. Also, we wil be converting to Roth IRAs which incurs conversion taxes, therefore if we have fewer accounts to convert by cashing in two regular 401Ks and eliminating those accounts, we will incur less Roth conversion taxes on the whole. It's complicated but we've been thoughtful about this.)

Why cash-out these two smaller 401K accounts to pay down credit cards substantially? 1) lighten our monthly expenses -- less money going to credit cards, and 2) we would like to speed up our pay-off of our debt. If doing this happened to make our credit score higher, great.

I expect our rating to be somewhere between 700-740, just don't know where in that range.) Each year when I check it, it's always higher than I expect. A good thing.

Then it occurred to me we'd have larger than average deposits and withdraws to our checking account in a short amount of time -- I wondered if that activity would be a red flag.... akin to a gift of money or reorganizing various bank accounts that CD posters complain leads to lender concern during underwriting. Based on what you said, if we're up front, that should not be a real big issue....we were planing to make the transaction now, getting pre-approved later this month and begin house-hunting next month. If I thought the transactions might cause too much grief, I'd just wait until after closing -- that was my original concern.

After reading your input, now I have a new question: I have yet to thoroughly review the link you provided but I (mistakingly?) thought that we couldn't take advantage of the no-penalty on the 401K cash-out for downpayment use because we are NOT first time homebuyers... isn't that loophole only for first-time homebuyers? That might change how we choose what pot of money goes where... as I said, we do already have 20% cash down. Perhaps it depends on the specific type of 401K account?
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Old 01-16-2012, 01:56 PM
 
4,541 posts, read 8,417,403 times
Reputation: 6529
Quote:
Originally Posted by Idlewile View Post
Will these deposits be a red flag to lenders and cause delay the in underwriting of our loan?
So go to a different bank, setup a new checking account to do the 401k transactions.
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Old 01-16-2012, 06:11 PM
 
Location: MID ATLANTIC
7,729 posts, read 18,598,912 times
Reputation: 8389
Quote:
Originally Posted by 399083453 View Post
So go to a different bank, setup a new checking account to do the 401k transactions.
In a nutshell, this is the answer without the 401/credit score/max loan debate. Don't disclose new checking account. Don't disclose 401K. Nothing illegal or immoral about it. You aren't required to list everything, only what you chose to use in your application.
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Old 01-16-2012, 07:53 PM
 
Location: Greater NYC
2,907 posts, read 4,921,084 times
Reputation: 3872
Quote:
Originally Posted by SmartMoney View Post
In a nutshell, this is the answer without the 401/credit score/max loan debate. Don't disclose new checking account. Don't disclose 401K. Nothing illegal or immoral about it. You aren't required to list everything, only what you chose to use in your application.
Thank you for the explanation; I assumed we were required to disclose all accounts to remain on the up and up, so to speak.
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Old 01-16-2012, 08:09 PM
 
4,541 posts, read 8,417,403 times
Reputation: 6529
You can disclose as much or as little as you want.
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Old 01-17-2012, 10:56 AM
 
4,791 posts, read 11,967,913 times
Reputation: 3453
Quote:
Originally Posted by Idlewile View Post
I am considering cashing in two of our smaller 401K accounts to pay down a stagnant credit card balance prior to pre-approval and house hunting next month. The total cash amount (after penalty and taxes) could be 11K-14K and would be deposited in our bank account prior to being transferred to our credit card to pay down the balance.

I want to know if the deposits even though they'll likely only be in our account for a couple of days are going to cause more trouble than it's worth with the lender 'investigating" them. What's the appetite of lenders for deposits and withdrawals of this size nowadays?

A few things:
No lectures please on cashing in 401Ks we have many more investment accounts with substantial balances. We've considered the trade-offs

We will have 20% down.

Credit rating between good-excellent pulling report and rating shortly.

(Yes, we've had credit card debt and had excellent credit scores and received excellent rates to buy our previous home.)

Will these deposits be a red flag to lenders and cause delay the in underwriting of our loan? Should we wait until after closing to make these transactions even if the pay down could bring our score up even higher for the absolute best rates? TIA.
With a paper trail it won't be a red flag at all. Take a copy of the check you receive from your 401k. Do an online print out of the 401k showing the withdrawl for the exact same amount. No problem.
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Old 01-20-2012, 05:32 AM
 
Location: Wake Forest, NC
835 posts, read 3,621,904 times
Reputation: 648
Quote:
Originally Posted by 399083453 View Post
You can disclose as much or as little as you want.

You are required to disclose all liabilities, but you don't have to disclose all assets.
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Old 01-21-2012, 07:08 PM
 
Location: MID ATLANTIC
7,729 posts, read 18,598,912 times
Reputation: 8389
Quote:
Originally Posted by dad2jules View Post
You are required to disclose all liabilities, but you don't have to disclose all assets.
That goes without saying - I think the point being made by both of us is you don't have to disclose every asset. Frequently we will leave off an asset from the final application, only because the documentation is more trouble than it's worth.
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