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Does a regular 401(k) loan count as debt when calculating one's Debt-to-income ratio when applying for a mortgage?

The loan is within the organization that manages the 401(k), and it does not show in any of the FICO score data.

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    It's a loan that you've got to pay back, so it should. But... even if it doesn't you should count it as debt -- because it's debt, and you've got to pay it back -- in your DtI calculation, no matter what the mortgage broker says. Remember: it's your life, your financial health, your marriage that's put at risk by deceiving yourself, not the mortgage broker's!
    – RonJohn
    Jul 29, 2019 at 17:25
  • @RonJohn Doesnt that mean the OP should also count the payments as income? As they are to themselves.
    – Vality
    Jul 29, 2019 at 17:46
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    @Vality #1 Is that money going to your checking account? Of course not; it's obviously not spendable money. #2 The whole notion that "you're paying yourself" is complete nonsense, since what you're really doing is saving a little extra, while losing out on the free money you'd have received from capital appreciation and dividend reinvestment in the 401(k) account.
    – RonJohn
    Jul 29, 2019 at 17:58
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    @RonJohn: It depends on what the alternative is. If the alternative is fully funding the 401(k) and not spending any money, the perspective is very different than if the alternative is taking home the money which needs to be spent and only contributing half as much to the 401(k). In the latter case, there's no growth being lost.
    – Ben Voigt
    Jul 31, 2019 at 2:12

3 Answers 3

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It does, because it is a regular payment. If a lender is wise, they will view a 401K loan as riskier than other types of debt. An auto loan or credit card does not require a balloon payment when you change a job, but a 401K loan does. And people change jobs frequently.

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  • The consequences of defaulting on a 401(k) loan are higher for the individual and lower for the creditor though. Your credit score is not impacted by defaulting on a 401(k) loan, which shows how the financial sector doesn't truly treat 401(k) loans as a loan.
    – GOATNine
    Jul 29, 2019 at 19:26
  • @GOATNine: How can the consequences be "higher for the [borrower] and lower for the creditor" in a 401(k) loan when both are the same person? Do you mean that relatively speaking the consequences for the 401(k) account owner are higher than for a borrower in other loans, and lower than for a lender in other loans?
    – Ben Voigt
    Jul 31, 2019 at 2:10
  • @BenVoigt I think GOATNine means "the creditor to whom you are making a mortgage application". I.e. the one who cares about the debt-to-income ratio and credit rating.
    – TripeHound
    Jul 31, 2019 at 7:04
  • Another potential reason for regarding a 401K loan "as riskier" is that – from what I've seen here on PF&M – they are often "a loan of last resort"... taking out a 401K-loan is an indicator (not a guarantee) that you can't get a loan anywhere else, and someone in that position is likely to be a higher risk.
    – TripeHound
    Jul 31, 2019 at 7:09
  • @TripeHound since 401(k) loans don't impact your DTI, I've personally taken one during a mortgage application. 401(k) loans don't tell you anything about the creditworthiness of a person (my FICO2 was 718 at the time, and FICO8 was over 740). I since realize what the cost was, but what's done is done.
    – GOATNine
    Jul 31, 2019 at 11:35
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A 401(k) loan is not considered in your DTI ratio, as your 401(k) is an asset of yours, not money on loan from another source. While incredibly unwise to take a 401(k) loan out (see second paragraph for a litany of reasons that is by no means comprehensive), It is the equivalent of "Borrowing" funds from an existing account under your control (albeit with stricter rules). 401(k) loans will, however, reduce what is considered to be your disposable income (for purposes like repaying student loans on an income based plan, and maximum mortgage size qualification).

401(k) loans are some of the singularly most expensive loans a person can take, as you lose out on not only the current interest from the account, but also potential future interest (40 years of growth compounding at an average of 7.5% post-inflation adjustment is ~$18 for every dollar loaned out). Additionally, many plans do not allow ongoing contributions with an outstanding loan (forgoing company match which is a guaranteed return of that % per dollar). In the USA, 401(k) loans must be repaid no later than 90 days from termination of employment (some plans restrict this even further, to 60 days, 30 days, or even immediately). Unexpected job loss makes this type of loan much riskier than it would seem at the outset. finally, 401(k) accounts have a maximum annual contribution limit (see IRS guidelines for the particular years limit, 2019 is $19,000 plus $10,000 catch up for those 55 years old and older) meaning that each year you do not max out, and each year that has less than optimal growth, is a year that underutilizes your 401(k) and the tax benefits it provides.

A quick search on the internet brought up several resources pointing to a 401(k) loan not impacting DTI. This being one.

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  • I don't agree with your reasoning - your house is an asset of yours as well, but mortgages certainly count as loans. Why would borrowing against your 401(k) be different?
    – D Stanley
    Jul 29, 2019 at 20:11
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    A well articulated view, but I disagree with much of the conclusion. Borrowing at 5-6%? Not too awful. Getting 5-6% on the cash portion of your retirement acct? Also not bad. The real issue, the one major problem of the 401(k) loan, is what happens if employment ends. Jul 29, 2019 at 20:47
  • @DStanley Equity is less liquid, the real-estate equivalent of a 401(k) loan would be a sale of the property with intent to buy it back later.
    – GOATNine
    Jul 30, 2019 at 11:15
  • @JoeTaxpayer I did note that in my second paragraph rant. The job-loss scenario makes the 401(k) loan much riskier than a conventional unsecured loan.
    – GOATNine
    Jul 30, 2019 at 11:17
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    My 401(k) loans also never showed up in creditKarma so I doubt that they even get reported to the credit agencies for the mortgage originator to take them into account.
    – xyious
    Aug 1, 2019 at 15:46
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If a lender is going by conventional loan guidelines (i.e. Fannie Mae or Freddie Mac), they do not need to include a 401(k) loan as part of the DTI. Here's the link directly to Fannie Mae's guide.

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  • I think that's an incorrect interpretation of the rule. A typical 401(k) loan is not secured by the 401(k). If you default on the loan then it is just treated as a disbursement and subject to tax and penalty. In other words, since you are just borrowing from your own account there's no "collateral" that needs to be transferred to the lender, because the lender is YOU. What's strange it that the IRS does not allow you to use your 401(k) as collateral in the traditional sense, so either the rule is poorly written or it was written to allow for that possibility in the future.
    – D Stanley
    Nov 13, 2023 at 18:07
  • I agree that it is not secured by the 401(k), but the thought is that as long as the funds could be accessed to pay the loan off (even if that means penalties), then the lender is not concerned. Guidelines can change, but here's the current guidance from a well-known lender: "When the loan is secured by a client's financial assets other than cryptocurrency, the monthly payments for the loan do not have to be included in DTI if a copy of the asset statement is provided showing there are sufficient assets in that account to cover the loan amount."
    – eire416
    Nov 17, 2023 at 21:13
  • But that's not what happens with a 401(k) loan - meaning if you default on a 401(k) loan, funds are not removed from your 401(k) to satisfy the loan - the funds have already been removed, and you are just paying yourself back. A default just make the remaining funds that you do not pay back a taxable distribution.
    – D Stanley
    Nov 17, 2023 at 21:29
  • Yes I should clarify, when I say "the funds", I am not referring to the loan funds but the remaining funds in the 401k, since you're only allowed to borrow half (and up to $50K, as you know). Speaking purely from the lender's perspective, if you've got the assets to cover it, you're ok. I'm not assessing whether or not it is a good idea for the borrower since each circumstance is different- just answering the question.
    – eire416
    Nov 17, 2023 at 22:00

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