Is it a good idea to borrow against your 401(k) to get the down payment to buy a home? If your employer allows you to borrow from your 401(k) plan, and most do, you can take the lesser of 50% of your vested balance or $50,000. The typical repayment term is five to fifteen years.

The interest you pay on the loan is not an issue, since you are borrowing from yourself, you would simply be paying interest back to yourself. One of the biggest downsides to borrowing against your 401(k) is that you are borrowing pre-tax dollars and paying the loan back with after-tax dollars. Hence, although the interest cost is meaningless since you are paying interest to yourself, there is a cost since you are taking out out gross dollars and paying them back with net dollars.

And If borrowing from your 401(k) keeps you from making your normal contributions, you will miss out on employer matching contributions, and you will miss out on growing your 401(k) for those years you are repaying your 401(k) loan. The bottom line is, when you are borrowing against your 401(k), you are not saving.

And if you lose your job or get laid off at the employer where the 401(k) loan is based, you will have to pay the loan off quickly (usually within 60 days), otherwise it is treated as an early withdrawal and subjected to the tax on ordinary income plus a 10 percent penalty.

The upside is that it may make your dream of home ownership come true, where it otherwise may not. Or you may have some cash saved for a 10% down payment, but a 401(k) loan may give you extra cash to reach to a 20% down payment and avoid mortgage insurance. Mortgage insurance can be incredibly expensive, and a 401(k) loan may come out as the cheaper alternative. And a 401k loan, even given the downsides, can be the cheapest forms of borrowing right now, cheaper than credit cards, borrowing from family (unless your family will give you a gift with no repayment expected), and cheaper than borrowing more on your mortgage.

You should ask an experienced mortgage professional to carefully weigh options if you are considering a 401(k) loan. You may also want to consult an accountant or financial planner.

Break open the piggy bank, because Freddie Mac now want to see a mortgage borrower have even more cash reserves that ever before. Cash reserves is the amount of cash you will have left over after a home purchase or refinance. This is your safety net and previously most lenders wanted to see at least two month's of your new monthly payment (called PITI, or Principal, Interest, Taxes and Insurance) in reserve after settlement. This does not have to be liquid monies in a saving or checking account, it can also be illiquid monies such as stocks, bonds or a retirement account.

The new requirements from FHLMC, which many bank and FNMA are bound to follow to some degree, are as follows:

Primary Residence:
Borrower(s) must have 6 months PITI in reserves.

Second Home:
Borrower(s) must have 2 months PITI in reserves for subject property. In addition, Borrower(s) must have additional 2 months PITI in reserves for each other financed second home and/or 1-4 unit Investment property in which the Borrower(s) have an ownership interest OR on which the Borrower is obligated.

Investment property (subject property):
Borrower(s) must have 6 months PITI in reserves regardless of whether rental income is used to qualify the borrower(s). In addition, Borrower(s) must have additional 2 months PITI in reserves for each other financed second home and 1-4 unit Investment Property in which the Borrower(s) have an ownership interest OR on which the Borrower is obligated.

Borrower’s current primary residence is pending sale or being converted to a second home or investment property:
Borrower(s) must have 6 months PITI in reserves for the new Primary residence and 6 months PITI in reserves for the current Primary residence pending sale/being converted. The required reserves can be reduced to 2 months PITI in reserves for each of the new primary residence and current Primary residence pending sale / being converted if all of the following requirements are met:
• Value of property pending sale / being converted is supported by a new appraisal with at least an exterior-only inspection that meets Freddie Mac requirements and is dated no more than 60 days prior to Note date (or effective date of permanent financing if new primary residence is a newly constructed home.
• LTV/TLTV/HTLTV for pending sales / being converted is less than or equal to 70%.

Yet again, mortgage guidelines are getting more and more strict. As always, it pays to talk, in depth, to a very seasoned mortgage professional. As it gets harder and harder to qualify for a mortgage, mortgage consumers should become more and more concerned with experience, execution and customer service, and not be as focused on getting the best price. Often times, the mortgage provider willing to quote the lowest price, gives the worst service or has the least knowledge, and in this complicated mortgage lending environment, that is a risk you cannot take. Risking an earnest money deposit on a new purchase, or risking a low rate you have locked-in on a refi, does not merit the risk of using an inexperienced or unknown mortgage provider. Be aware of how complicated getting a mortgage has become, ask a lot of questions up front, and value experience accordingly.

When is an approval letter really an approval letter? Why is an approval letter not an approval letter, but it's really a conditional approval letter? Is this a semantics discussion only? Either way, this matters more than you know.

Whether a mortgage borrower knows it or not, when a lender tells them the loan is "approved", there is always a laundry list of "conditions" on the "approval letter". Further, the document the lender gets likely says "Conditional Approval Letter." It is almost impossible to get an "Approval Letter" because there are always some conditions, such as the below standard conditions:

acceptable title search.

acceptable homeowners insurance policy.

pending return of processed 4506T from IRS (see my blog about this form, here).

wiring instructions, closing agent fee sheet, E&O insurance and closing amendment– need 72 hours prior to close.

pending internal verbal verification of employment (this is a last minute phone call to the borrower's employer to make sure they are still employed).

all liens to be released from title; all taxes to be paid current.

title company must send HUD-1 to lender prior to closing for approval.

And then there are loan approval conditions that are hard to predict or may be due to something missing from the loan package that should have been included:

evidence of a debt being paid off if required to make debt ratios work.

evidence of source of funds for a large deposit (if you have a large deposit on a bank statement, the underwriter will want to document where it came from to make sure you are not borrowing money from a disallowed source for the down payment).

documentation on what a deduction on a pay stub is for (if it is for a loan against a 401k account, for example).

review appraisal required (on some loans a bank or underwriter may determine the appraisal needs to be reviewed for accuracy).

proof of taxes and insurance on another property owned.

I could go on and on and on. You have no idea the length to which an underwriter can dream up a paranoid based reason to ask for any number of loan approval "conditions".

The problem is that there usually comes a point where a seller will ask a buyer to release the "financing contingency". This is where I inevitably get a call asking, "do we have loan approval, can I release the financing contingency". When I send a copy of a "Conditional loan approval", this is where the fun begins.

Some buyers get incredibly nervous, considering that there are still "open issues" and remaining loan approval conditions. But there is a point where you can feel comfortable, knowing that the conditions are either standard or easily met. If you know you have a rational explanation and can document every condition, then release the financing contingency. If there are a few leftover conditions like acceptable title work, don't worry that you'll lose your deposit if there is a cloud on the title and a problem with the title work, that is the seller's fault, not yours.

The bottom line is that as long as a buyer moves forward in good faith, and uses all due diligence in providing what the lender asks for, you will be safe in releasing the financing contingency even when you have a "conditional loan approval", as long as you know the conditions are easily satisfied.

The IRS 4506 is an IRS form used to request a copy of your tax returns from the IRS. Mortgage lenders now require a borrower to sign a 4506 to get a loan. It is an anti-fraud measure and data gathering step. And it can cause problems…

The problem is that a 4506 can take a long time for the IRS to process. Some lenders do not request the 4506 until a bank has issued a loan approval, usually a "conditional loan approval". They see no reason to process a 4506 and snoop into people tax returns if the loan is not approved, so they have to wait. A conditional loan approval is one where the lender considers the loan approved, but there are still "conditions" the borrower must meet before settlement. One of the standard conditions is getting a 4506 done through the IRS. And this, as you can imagine with the U.S. government, can at times cause delays. If you get a loan approval 2 weeks prior to settlement, then there is plenty of time to get the 4506 process done. If you get loan approval done 1-2 days prior to your anticipated settlement date, don't call the movers. Even when the 4506 is ordered early in the transaction, before loan approval, the IRS can delay things.

Any mortgage lender that works through FNMA, FHLMC, FHA or VA, and even the portfolio lenders who follow their own rules, all have to have a 4506 processed, its mandatory. So they are asking mortgage applicants to sign the IRS Form 4506, which is technically called a "Request for Copy or Transcript of Tax Form" as part of the application process. Once signed, you are giving them permission to retrieve copies of your tax returns, as far back as 2 years usually.

It is an anti fraud measure because it double checks the tax documents that a mortgage applicant provides during the process, and ensure the documents from the IRS match what is on the documents provided by the borrower.

It is a data gathering tool because on loans for people who are salaried, there is only a requirement to submit copies of W2's, not tax returns. So the underwriter processes the 4506 request to see if there is any information on the tax returns that causes a question or problem in the loan application, since this data would not be found in a W2 and would not be found on the loan application if the mortgage applicant withholds it or simply forgets to report it.

Have a side business that shows a loss every year? Look out, that affects your debt ratios.

Own other properties you did not disclose because they are owned free & clear and you feel it is nobody's business? Look out, its the underwriter's business, and they'll find out. And they'll count any taxes, insurance and possibly other expenses against your debt ratios.

Have unreimbursed business expenses on a salaried job that you claim as a tax write off? They'll be discovered and will count against you as a debt.

Have a second home and claim not to derive any rental income from it? And that the home is solely a 2nd home for your personal enjoyment? The 4506 process will pull the tax returns to show if you do have income because the home is really a rental property!

There is nowhere to run, nowhere to hide!

I also talk about how there is nowhere to hide in this blog post, its especially entertaining. The bottom line is, although people still seem to try, it pays to tell all the truth about your financial picture when applying for a loan, it will get found out anyway!

Ever get a surprise you did not want? Chances are you have if you have gotten a mortgage in the last 3 years.

I have had to pass on more last minute surprise paperwork requests and loan approval conditions in the past 3 years, than I have in all the prior years in my 25 years in this business.

I have seen a loan approval come through with some loan approval conditions, then I send up those conditions from my client, but then have seen an underwriter decide to add a new one after the fact!

Or I have sometimes received a clean loan approval with no loan conditions, and then have seen an underwriter add a condition they "missed" just prior to settlement.

I recently had a loan approved and the credit report had expired (credit reports are usually only valid for a certain period of time), and the underwriter who did not notice this at loan approval decided to ask for an updated credit report 1 day prior to closing, which delayed closing!

The bottom line is to expect the unexpected, comply as best you can, and understand that the mortgage environment is very difficult right now. I never count a settlement as completed until the clients have signed, received their keys, and walked in the door of their new home!

Wake up America, it's government's fault! Anyone that follows this blog knows I like to bash banks, especially big banks. But to be fair, its time I pull the curtain aside from the real villain in the mortgage industry, the United States government!

The US Government, after all, has taken FNMA and FHLMC into receivership. The Feds are running the show! And it seems like there are hundreds of rules to follow these days, and the banks and the underwriters are forced to get increasingly strict in enforcing them.

A mortgage borrower has to address and document any deductions taken out of a paycheck, explain and document large deposits on bank statements (and sometimes anything over $500 is considered large), provide all pages of your bank statements even if a page is blank or a summary page or has an advertisement, provide all pages of your tax returns, don't borrow money or open a new credit card or buy anything costly when you are getting a loan, explain any gap in employment, I could go on and on and on. The importance of a paper trail for darn near your whole financial life cannot be understated. If you have gotten a loan in the last few years you know what I am talking about.

And it seems mortgage borrowers always want to blame the bank, the underwriter or the mortgage professional helping them get the loan. But the truth is, call your Senator or Congressperson! This mess is the creation of FNMA, FHLMC and FHA, who now back 95% or more of all loans. The industry is only catering to them now, we are not writing the rules, the Feds are!

It is not the mortgage professional, the bank or the underwriter who cares about all the minutia. It's the simple fact that if the bank and underwriter don't dot every 'i' and cross every 't', they know that FNMA may say the loan is ineligible for sale to FNMA, and that is a costly mistake for a bank. The underwriter's are told, "it's your name on the approval, MAKE SURE THIS LOAN CAN BE SOLD TO FNMA!" So bank's have to tell underwriter's to overkill. Underwriter's have to ask mortgage professionals to extract more and more paperwork from their clients. It gets to the point where you wonder if FNMA really wants to be in the loan business!

So the next time you hear of a delay in getting your loan, or wonder why in the world the underwriter is asking for 14 different things that you feel you have already provided in some fashion, CALL YOUR GOVERNMENT REPRESENTATIVE and ask them to help get FNMA reformed and off our backs! Go here to find out how to call your representative.

I hope you are not getting tired of blog posts about foolish decisions by banks and underwriters, that topic seems to be taking over the content here on my blog because, well, that is what is taking over the mortgage industry! The latest bit of arbitrary decision making comes from a large bank and its computer system.

We uploaded a loan to them for an underwriting decision on September 1st. They canceled the lock-in and closed the file on September 14th. Hmmm, "why?" I wondered aloud.

The bank was called and they claimed there has been no activity on the file, so they arbitrarily canceled the lock-in on the interest rate and sent the file back! Huh?! What?! Why?! There absolutely has been activity! We just submitted the file for underwriting 2 weeks ago! And we have been waiting on you, Mr. Arbitrary Bank!

Why would a bank make an arbitrary decision like that, that has serious financial impact on the client? How about an email? How about a phone call? How about some heads up, or questions as to where the file is? Then we could tell them the file had been uploaded weeks ago, and to check their system. But no, banks are arbitrary, moronic, and robot like. All we get is (read this in your best robot voice) "your loan was not found, your loan does not exist, your loan was canceled, your loan does not compute, your loan violates the law of our land, your loan is a great hindrance to us."

We had to go back into the bank's computer system, re-lock the loan's interest rate (at a loss to us, not the client), submit the loan to the bank's system once again, and now we have lost 2 weeks.

All of this because of the arbitrary nature of a bank and its computer system. So now we'll have to treat the bank like a child, as below:

Sane Mortgage Professional: "Hello bank, did you get our loan package we uploaded 10 seconds ago? Of course we don't mind holding for 25 minutes."………………….."Hello bank, are you there?" Oh, no, not yet, just more music by the BeeGee's………………

Arbitrary Bank: "Hello, this is the bank, we do not have your loan registered as being uploaded in our system, please try again. Goodbye."

Sane mortgage professional: "Wow, I am glad we checked, I'll try again until we know the loan is on their system and in their queue."

I guess this is the way it has to be from now on. We'll have to double and triple check each step, require verifications for each small movement and bit of progress on the file, so no one at the bank can claim anything that is untrue. Swell, more steps, more procedure, more time and more paperwork. Just what this industry needs.

I had to trick an underwriter the other day, and I am not losing sleep over it. It is a great story, and one worth retelling so that others may use this trick.

I had a refinance client who wanted to pay their loan down by $200,000 from $450,000 to $250,000 and then refi to a lower rate. They had $400,000 in a money market account to do this, and that account happened to be in their business's name. They were self employed, and were operating a consulting business from home.

When a business bank account is being used an underwriter will typically check to make sure the withdrawal of any business funds from the business won't damage the ongoing stability of the business, since that is where the borrower draws their income from. But this client had a very high credit score, a low Loan-To-Value (LTV) on the loan, and had $200,000 left in the business account after paying down the loan. Further, the business they ran was a low expense, consulting business, run from home. Their tax returns showed their expenses were not even $20,000 a year, so the client had enormous cash reserves left to cover expenses for a decade, and clearly the stability of the business nor the client's income were not threatened.

However….enter the underwriter. This particular underwriter insisted on seeing a letter from the client's accountant stating that the withdrawal of the funds from the business account would not negatively impact the business.

I told the underwriter the client did not use an accountant, and filed her own taxes. The underwriter's reply was:

"I need a letter from the client's accountant stating that the withdrawal of the funds from the business account would not negatively impact the business."

I repeated, "they do not use an accountant."

The underwriter said, "I need to see a letter from some accountant stating that the withdrawal of the funds from the business account would not negatively impact the business."

I said, "no accountant will write such a letter, and speculate about the future viability of a business, that is inviting a potential lawsuit down the line."

The underwriter said, "I need a letter from some accountant stating that the withdrawal of the funds from the business account would not negatively impact the business."

I said, "so it seems your saying you need a a letter from an accountant stating that the withdrawal of the funds from the business account would not negatively impact the business?"

So I was being sarcastic, so what? I was infuriated. In the underwriter's defense, I have been asked for these letters in the past, and have seen accountant's write them before. But I felt in this case, with a high credit score, low LTV, and $200,000 in cash reserves, that anyone should be able to see that this loan was safe, the business was stable after the cash withdrawal, and there was no need for any extra documentation nor a letter from an accountant.

Now comes the trick. This particular bank has an email address they use for general underwriting questions. An actual underwriter will reply to a scenario and tell you if the loan should be doable or not. I emailed this email address, gave the exact scenario of my client (who of course was already in their underwriting department, which I did not state), and asked if the loan was possible with no exceptions. The same day reply was, "yes, this loan should be no problem, and will not require a letter from any accountant, the withdrawal of the business assets is fine." I took this email reply, to the head underwriter, and asked why one underwriter would do this loan without exception and not another. The head underwriter reviewed the file, overrode the first underwriter, approved it himself with no requirement for an accountant letter, but did ask to see additional bank statements on the business account to review the cash flow, and we went to settlement within one week.

Case closed, smart people win, underwriters lose.