Can I use a 401k loan as part of my down payment? If so, will I have to factor in the payment I need to make to repay my 401k in my debt ratio?

A common question, especially for first-time homebuyers, is whether a principal residence 401k loan can be used for a down payment. Since coming up with the funds for a down payment can be challenging, many lenders allow borrowers to use money from a 401k loan for both the down payment and closing costs.

Though borrowing from your 401k might feel counterintuitive — since you’ll eventually need to repay it — most lenders don’t factor these repayments into your debt-to-income ratio. Here’s a breakdown:

• Fannie Mae (Conventional): You can use a 401k loan for your down payment, and the repayment is not included in your debt-to-income ratio.
• Freddie Mac (Conventional): A 401k loan is allowed for the down payment, with no impact on your debt-to-income ratio.
• FHA: You may use a 401k loan for the down payment, and the repayment does not affect your debt ratio.
• USDA: A 401k loan is permitted for your down payment, with no requirement to factor the repayment into your debt ratio.
• VA: You can apply a 401k loan toward your down payment, and the repayment is excluded from your debt-to-income ratio.

We answer more top mortgage questions in our free eBook. And for any additional questions you might have, reach out today — the Blue Water team is happy to connect.