How to Use a 401(k) as a Reserve for a Mortgage

When you secure a mortgage for a personal residence or investment property, your lender will require a large amount of personal information, including your credit report and history, your employment information and the value of your assets – specifically your liquid assets. Lenders verify your financial information to make sure you can afford the mortgage payments, as well as cover the required down payment. Lenders also may require you to have reserve funds available to cover the mortgage in the event that you face financial hurdles down the road.

Asset Reserve Requirements

When you apply for a mortgage, your lender will specify how much capital you need as a reserve in terms of months. For instance, if the lender requires a three-month reserve, you’ll need to show funds to cover your mortgage principal, interest, tax and insurance for three months. You may also need reserves to cover three months of mortgage insurance, if applicable. For primary residences, lenders usually require a smaller reserve – typically two months. For second homes and investment properties, your lender may require anywhere from three to six months of reserves.

401(k) Investments

Because a 401(k) account is your personal investment, most lenders will allow you to use these assets as proof of reserves. However, your lender will likely only count 75 percent of your account funds, due to the tax penalties you will pay if you actually have to withdraw the money early to cover your mortgage payments. Using your 401(k) investment as your reserves does not require you to actually make a withdrawal; your lender simply wants to see that it’s there and available, so you’ll be required to furnish current account statements to close your transaction.

Other Types of Reserves

Aside from your 401(k) funds, your mortgage reserves can take many forms. While most lenders prefer liquid assets, such as cash in checking and savings accounts, they will usually accept other types of assets as reserves. These include stock portfolios, mutual funds, money market accounts and simplified employee pension accounts. To verify that you meet the reserve requirements, your lender will require you to show at least two consecutive statements from each account you’re using. These statements must also be current, so you may need to furnish them when you apply for the mortgage and again when you are closer to closing the transaction.

Seasoned Funds

Your lender will require your reserve funds, including those in your 401(k), to be “seasoned.” This means the money has been in the account for a certain length of time, typically 60 days. Lenders require seasoning to ensure that borrowers are not using personal loans from friends or cash advances as their reserve funds. Your lender will also require an audit trail for all recent deposits. For instance, if you recently sold stocks from a brokerage account and deposited the proceeds into your checking account, you’ll need to show statements from both accounts, as well as any paperwork associated with the transfer. Similar to seasoned money, your 401(k) funds may not all be vested, in which case the lender will usually only count those funds that are available for withdrawal.