Kids talk about mortgages and what they want in a home [video]

Produced for jennyloans.com by Caffeine-Free Films
Song: Bach's Minuet - Notebook for Anna Magdalena by Aaron Dunn

DEAR JENNY: Can I use funds from my 401(K) as a down payment?

You've finally found the home of your dreams. There's just one thing standing between you and your new house: the down payment.

Hardship withdrawals

Many home buyers today opt to use funds from their employer’s 401(K) program to come up with the down payment on a house. Ordinarily, you can't take money from your 401(K) plan unless you retire, leave the company or become disabled, but many company plans permit certain “hardship withdrawals” when there is an immediate and heavy financial need, including the purchase of the employee's principal residence.

The drawback to a hardship withdrawal is that you will pay taxes and penalties on the amount withdrawn from your plan, which often must be paid in the year of withdrawal. And while hardship withdrawals are allowed by law, your employer is not required to provide them in your plan. Check with your employer’s human resources department if you're not sure if your 401(K) plan allows hardship withdrawal.

Borrow against your 401(K) 

Another approach may be to borrow against your 401(K) – often as much as 50 percent of your account balance. You pay interest on the loan, but the interest goes back into your account. The money you receive is not taxable as long it is paid back and plans can give you anywhere from five to 30 years to pay back your loan.

There are risks involved in borrowing from your 401(K). If you lose your job or leave your employer, you must pay back the loan in full within a short period, sometimes as little as 60 days. If the money is not paid back in that time, it is considered a withdrawal from your plan and subjected to the same taxes and penalties. And while 401(K) accounts can usually be rolled over into a new employer’s 401(K) without penalties, loans from a 401(K) cannot be rolled over.

In addition, because the funds withdrawn from your account are no longer earning compound interest, your account will be smaller when you retire. And you’ll be replacing pretax money with after-tax money.

Some lenders will count the money you borrowed from your 401(K) as an additional debt that will go along with your car payments, student loans and credit cards. While it may seem unfair since you are borrowing your own money, most lenders view it as a payment obligation that affects your debt-to-income ratio in qualifying for a home loan. It may be a factor in whether you decide to make a hardship withdrawal from your 401(K) and pay tax penalties or borrow against it.

Consult your financial advisor before making any decisions regarding your 401(K).

JENNY'S TIPS: How much can you afford?

Deciding how much house you can afford is a personal decision.  Many factors come into play.  How much can I borrow?  How much can I put toward my down payment?  What size monthly payment can I afford? 

There are no black and white answers to these questions.  It's a matter of give and take.  If you plan on a 30 year mortgage, you can probably make a lower down payment and still manage the monthly payments.  If, on the other hand, you plan on a 15 year mortgage, you'll probably want to make a larger down payment to keep your monthly payments in line with what you can afford. 

How large a down payment can I make?

Many buyers look at their cash on hand as their only source for their down payment.  This simply is not the case.  One way to fund or partially fund a down payment is by using a gift.  Parents, grandparents and other family members are often eager to help by making a cash gift toward the purchase of your home. 

There are also down payment assistance programs that can help you.  And, of course, if you are selling a home, the equity you've built up can be applied to your down payment.

What size monthly payment can I afford?

When determining what size monthly payment you can afford, you'll want to consider what other monthly expenses you have.  Tangible expenses such as car payments, day care, and utility bills all play a role in how large a monthly payment you can afford. 

There are also the intangible expenses or lifestyle expenses that you'll want to consider.  Things such as dining out, travel, and when you buy your next car can effect how much you can afford.  Are you willing to curtail or delay some of these expenses in order to afford a larger monthly payment? 

How much can I borrow?

This is a question you'll want to get answered before you begin your home search.  This is something that we're here to help you with.  Our mortgage calculators will help you see how your down payment, monthly payment, and the amount you borrow are all interrelated.

JENNY'S TIPS: How to deal with a Bankruptcy

A bankruptcy filing delivers a devastating blow to your credit and FICO score, but it doesn’t mean you have to wait 10 years before you can qualify for a mortgage. Many consumers who have filed for bankruptcy have been able to obtain a mortgage, although it is often at a higher rate than someone qualifying for a prime or "A-paper" loan.

While credit card companies may care about what happened before you filed for bankruptcy, many mortgage lenders are more interested in your recovery — what you’ve done since your filing. It won’t happen over night, but here are some tips and things to keep in mind when you inquire about a mortgage with a tarnished credit past:

Give explanations

No mortgage lender is going to ignore the fact that you’ve filed bankruptcy and he or she will likely want to know the cause of the filing. Your lender will be particularly interested in whether the same situation could happen again. Your chances of being qualified are much better if your bankruptcy was caused by a single event such as a loss of employment or a death in the family, than if it was the result of “just spending too much.”

If the bankruptcy resulted from a single event, it is important to show your lender paperwork describing the incident, such as the layoff notice or death certificate. You may also want to bring in court documents to indicate when the bankruptcy was filed.

Demonstrate good money habits now

Many people who file bankruptcy swear off credit altogether, however, it is important to re-establish your credit rating. Get a secured credit card or take on some sort of loan — furniture, a car or a major appliance — to demonstrate that you are able to make timely payments. Make sure you are making other payments (utility bills, cell phone, etc.) on time as well. You won't turn things around in a year but your credit score will improve over time.

Dispute any credit report errors

There’s no need to add to your troubled credit history with errors on your credit report. Get a copy of your credit report from each of the three major credit reporting agencies: Equifax, http://www.equifax.com; Experian, http://www.experian.com; and TransUnion, http://www.tuc.com. If you encounter any errors, inform the CRA in writing what information you believe to be inaccurate and request deletion or correction.

Save your money

Lenders may be more willing to loan you money if you’ve saved up a considerable amount of money for a down payment.

Live within your means

Think small when the time comes to look for a home. Smaller homes often mean smaller mortgages.