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How do i get a loan to buy a home if i cannot get a conventioal loan?

our home went through foreclosure in jan 2013 is there any way I can pull money from my 401 to buy my family a new home

Nov 16, 2013 by susie from Hillsboro, OH in  |  Flag
4 Answers  |  8 Followers
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4 votes
Andy Tilp, CFP® Level 16

Hi Susie, It sounds like you are in some financial difficulties and I am curious why you are putting a priority on buying a house. It may be best to rent and establish as firm financial foundation before jumping into a home.

Regarding your specific question about using your 401k to buy a home. Are you aware that with most 401k plans, if you leave the employer or are laid off, the loan is due, in full. The question to ask yourself is whether your job is stable and if you would have funds available to pay back the full loan just as you are leaving your job. If you are unable to pay the loan back then you will likely owe a significant tax penalty on all the money you borrowed.

From the little information you gave, it sounds like your financial situation is a bit tenuous and borrowing from your 401k could even worsen your situation. To give you specific advice, I would need to know a lot more about your situation. However, in general, I am almost always against borrowing from a 401k. I hear the comment ‘but the money is just sitting there’. Yes - That is the purpose of a retirement accounts! The purpose of the account is for a person to invest and grow their assets, tax deferred, for their retirement. It not savings accounts for near term needs or goals. Like it or not, in today’s world, individuals have the responsibility of saving and investing for their own retirement.

Taking the money out now will require the need to save an even greater portion of a person's income later. The money should be left intact to take advantage of compound growth. Far too many Americans reaching the 40’s, 50’s and 60’s are discovering they didn’t save enough (or anything) for their retirement. To catch up, they will need to save half or more of their paycheck – are you prepared to do that? The other alternative is to work into your 70s or 80's.

Please excuse me for coming off rather harsh. Renting is a fine solution to provide your family a home. Establishing an emergency fund and retirement investments should be your priority. Once these are in place and you ready for the long term, and then consider buying a home.

1 Comment   |  Flag   |  Nov 16, 2013 from Sherwood, OR

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Flag |  Sep 29, 2017

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3 votes

Susie, I'd echo Andy's comments. You didn't say what exactly caused the financial difficulties that led to foreclosure, but whatever the reason you lost your house, it may be too soon to think about buying another property. There's no shame in renting while you sort out your financial situation and get back to a more stable position.

I'd also strongly advise against pulling money out of your 401(k) to buy another house. You'll pay extra taxes and penalties for doing so, and you won't have that money to pay for things you need in retirement. Instead, focus on building up your emergency savings, paying down any other debt you may have (like credit card debt), continuing to save for retirement, and perhaps saving for another down payment. This will also give you time to rebuild your credit score, so you may be able to qualify for a more favorable mortgage loan in the future.

If you're struggling to make financial decisions and need help prioritizing what's most important, I'd suggest talking to a fee-only financial planner (one who charges by the hour may be best for your situation). Also, many churches and community organizations offer free or low-cost classes on financial planning. Signing up for one of these courses may be helpful as well.

Comment   |  Flag   |  Nov 20, 2013 from Township of Anderson, OH

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You probably can't at this time. Get your financial situation and credit report in order over the next 12-24 months and try again later.

Comment   |  Flag   |  Jan 23, 2014 from Canton, GA

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Herbert N Glass Level 18

I'm not sure anyone really answered your specific question - so I will.

If your 401(k) plan has Hardship Withdrawal provisions, the need for money to buy a principal residence does qualify as a reason for a participant to be granted a hardship distribution. However, you should know that the law says if the plan also has a participant loan provision, you must take a maximum loan before being able to receive a hardship distribution.

Now, with respect to the question regarding whether or not you would qualify to get a mortgage if you have bad credit and do not qualify for a conventional loan, the answer is "it depends." First, it is generally easier to get a mortgage loan than other types of loans because a mortgage lender will have your home as collateral if a default were to occur. Additionally, there are mortgage lenders that specialize in making loans to people with bad credit. Those type of mortgages are called "sub-prime mortgages." Even though many think the availability of "sub-prime mortgage" money has been non-existent since about 2010, there are still lenders that will make such loans. I'm sure if you check around, you will find a mortgage brokerage company that will know how to take your information and see if you will qualify to get such a loan.

I hope this answers your question. I wish you much good fortune in the future.

Herbie Glass Certified Pension Consultant

Comment   |  Flag   |  Nov 11, 2016 from Franklin, MI

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