Is 401k Considered an Asset for Mortgage?

A 401(k) is a retirement savings plan offered by employers, allowing employees to save and invest a portion of their paycheck before taxes. These contributions and any earnings grow tax-deferred until withdrawal in retirement. When applying for a mortgage, a common question is whether 401(k) funds are considered an asset by lenders.

401(k) as a Mortgage Asset

A 401(k) is generally considered an asset by mortgage lenders. While primarily designed for long-term retirement savings, its value can contribute to a borrower’s overall financial strength and stability when applying for a home loan.

These accounts are viewed as verified assets, demonstrating financial credibility. They are not usually considered direct qualifying income for mortgage purposes. Instead, a 401(k) balance can serve as proof of available reserves or liquidity, indicating additional funds that could be accessed if needed to cover mortgage payments. Only the vested portion of the 401(k) balance, which the employee fully owns and can access, is relevant.

Lender Assessment of 401(k) Balances

Mortgage lenders do not count 100% of a 401(k)’s vested balance as an asset. Lenders apply a “haircut” or discount factor to the vested amount. This adjustment accounts for potential taxes and penalties from early withdrawals.

Lenders commonly count only 60% to 70% of the vested 401(k) balance as an accessible asset. This approach is rooted in tax implications of withdrawing funds before retirement age. For instance, individuals under 59½ years old generally face a 10% early withdrawal penalty from the IRS when taking a distribution from a traditional 401(k).

Amounts withdrawn from a traditional 401(k) are also subject to ordinary income tax. The combination of penalties and income taxes means the net amount a borrower could access from their 401(k) is significantly less than the gross balance. This discount helps lenders gauge the true liquidity of these funds, ensuring a realistic assessment of financial reserves.

Required Documentation for Lenders

To verify 401(k) assets, mortgage lenders require specific documentation. The most common documents are recent 401(k) statements. These typically include the most recent quarterly or annual statements, or statements covering the last two to three months.

Lenders scrutinize these statements for key information. They confirm the account holder’s name, current balance, and vested percentage of funds. This verifies ownership and the amount the borrower is entitled to access. Lenders also look for any outstanding 401(k) loans, which can significantly reduce the net available asset amount. Provide all pages of these statements, even if some appear blank, to ensure completeness.