March 25, 2013
A reader asks, “My sister in law borrows some fund from her 401(k) to refinance her home. She certainly has to back the fund back to her 401(k). The lender says this monthly payment shall be counted when computing her Debt to Income Ratio. According to the FHA, the following list of financial obligations should not be used to calculate the debt to income ratio:
Other retirement contributions, such as 401(k) accounts (including repayment of debt secured by these funds). I notice that this blog was written in year 2011. Do these rules still apply at present or have there been any changes so far?
It’s true that the FHA has guidelines about how to view a 401K when it comes to calculating the debt-to-income ratio. According to HUD 4155.1:
“Obligations not considered debt, and therefore not subtracted from gross income, include
- Federal, state, and local taxes
- Federal Insurance Contributions Act (FICA) or other retirementcontributions, such as 401(k) accounts (including repayment of debt secured by these funds)”
Also, the same rulebook adds,
“Up to 60% of the value of assets such as Individual Retirement Accounts (IRA), thrift savings plans, 401(k) and Keogh accounts may be included in the underwriting analysis, unless the borrower provides conclusive evidence that a higher percentage may be withdrawn, after subtracting any
–Federal income tax,
and
–Withdrawal penalties.”
In such cases, redemption evidence is required by the lender, and the portion of the 401K not used to meet closing requirements can be considered cash reserves.
What is very important to note is the portion of the reader question that concerns paying back the money withdrawn from the 401K. “The lender says this monthly payment shall be counted when computing her Debt to Income Ratio.” The lender may be interpreting the new need to pay back the funds to her 401K as a recurring debt.
It’s a very good idea to ask about lender standards in situations like these, as the lender is free to require more strict standards in such areas than the FHA minimums or basic guidelines as mentioned above. (As long as such standards are applied in accordance with the Fair Housing Act and other relevant laws.)
For more information on this issue, contact the FHA directly for assistance.
Do you have questions about FHA loans or refinance loans? Ask us in the comments section.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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