Mortgage application denied due to large 401k contribution?s

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rudeboy
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Mortgage application denied due to large 401k contribution?s

Post by rudeboy »

Hello,

I just learned that my mortgage application has been denied because my 401k contributions have brought my AGI, and therefore my debt-to-income ration to 90% (aside from the mortgage, est. $750/month, my debt was a $60 credit card balance). The past 2 years I've had ~68k gross income and ~14k expenses. However, I've contributed so much to my individual 401k that my AGI has been about 1k/month. Without the 401k contributions, I would have comfortably qualified for the mortgage.

Has anyone had a mortgage application denied because of large 401k contributions? Is there a work-around for this? Help!


EDIT: Forgot to mention that I am a self-employed sole proprietor.
Last edited by rudeboy on Tue Apr 13, 2021 2:32 pm, edited 1 time in total.
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anon_investor
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Re: Mortgage application denied due to large 401k contribution?s

Post by anon_investor »

rudeboy wrote: Tue Apr 13, 2021 2:28 pm Hello,

I just learned that my mortgage application has been denied because my 401k contributions have brought my AGI, and therefore my debt-to-income ration to 90% (aside from the mortgage, est. $750/month, my debt was a $60 credit card balance). The past 2 years I've had ~68k gross income and ~14k expenses. However, I've contributed so much to my individual 401k that my AGI has been about 1k/month. Without the 401k contributions, I would have comfortably qualified for the mortgage.

Has anyone had a mortgage application denied because of large 401k contributions? Is there a work-around for this? Help!
Did you share any information about your 401k balance? I did a refi before, where I provided a copy of my 401k statement and the plan rules around 401k borrowing.
Mike Scott
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Re: Mortgage application denied due to large 401k contribution?s

Post by Mike Scott »

It seems odd that they are not looking at gross income since the 401k contribution is voluntary. Can you ask the lender to double check their evaluation?
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rudeboy
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Re: Mortgage application denied due to large 401k contribution?s

Post by rudeboy »

anon_investor wrote: Tue Apr 13, 2021 2:30 pm
rudeboy wrote: Tue Apr 13, 2021 2:28 pm Hello,

I just learned that my mortgage application has been denied because my 401k contributions have brought my AGI, and therefore my debt-to-income ration to 90% (aside from the mortgage, est. $750/month, my debt was a $60 credit card balance). The past 2 years I've had ~68k gross income and ~14k expenses. However, I've contributed so much to my individual 401k that my AGI has been about 1k/month. Without the 401k contributions, I would have comfortably qualified for the mortgage.

Has anyone had a mortgage application denied because of large 401k contributions? Is there a work-around for this? Help!
Did you share any information about your 401k balance? I did a refi before, where I provided a copy of my 401k statement and the plan rules around 401k borrowing.
Yes, I shared that we have retirement assets of ~500k.
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anon_investor
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Re: Mortgage application denied due to large 401k contribution?s

Post by anon_investor »

rudeboy wrote: Tue Apr 13, 2021 2:31 pm
anon_investor wrote: Tue Apr 13, 2021 2:30 pm
rudeboy wrote: Tue Apr 13, 2021 2:28 pm Hello,

I just learned that my mortgage application has been denied because my 401k contributions have brought my AGI, and therefore my debt-to-income ration to 90% (aside from the mortgage, est. $750/month, my debt was a $60 credit card balance). The past 2 years I've had ~68k gross income and ~14k expenses. However, I've contributed so much to my individual 401k that my AGI has been about 1k/month. Without the 401k contributions, I would have comfortably qualified for the mortgage.

Has anyone had a mortgage application denied because of large 401k contributions? Is there a work-around for this? Help!
Did you share any information about your 401k balance? I did a refi before, where I provided a copy of my 401k statement and the plan rules around 401k borrowing.
Yes, I shared that we have retirement assets of ~500k.
Did you give them both pay statements and W-2? I think for that particular refi, I provided both, and at least on mine, it was pretty clear what my gross income was and what my taxable income was. Obviously YMMV.
brian91480
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Re: Mortgage application denied due to large 401k contribution?s

Post by brian91480 »

rudeboy wrote: Tue Apr 13, 2021 2:28 pm Hello,

I just learned that my mortgage application has been denied because my 401k contributions have brought my AGI, and therefore my debt-to-income ration to 90% (aside from the mortgage, est. $750/month, my debt was a $60 credit card balance). The past 2 years I've had ~68k gross income and ~14k expenses. However, I've contributed so much to my individual 401k that my AGI has been about 1k/month. Without the 401k contributions, I would have comfortably qualified for the mortgage.

Has anyone had a mortgage application denied because of large 401k contributions? Is there a work-around for this? Help!


EDIT: Forgot to mention that I am a self-employed sole proprietor.
In most cases, 401k assets are not touchable if you file for bankruptcy. A lender doesn't care what assets you have. Lenders care about what assets you have -- that they can actually collect if you stop paying your mortgage.
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rudeboy
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Re: Mortgage application denied due to large 401k contribution?s

Post by rudeboy »

brian91480 wrote: Tue Apr 13, 2021 2:41 pm
rudeboy wrote: Tue Apr 13, 2021 2:28 pm Hello,

I just learned that my mortgage application has been denied because my 401k contributions have brought my AGI, and therefore my debt-to-income ration to 90% (aside from the mortgage, est. $750/month, my debt was a $60 credit card balance). The past 2 years I've had ~68k gross income and ~14k expenses. However, I've contributed so much to my individual 401k that my AGI has been about 1k/month. Without the 401k contributions, I would have comfortably qualified for the mortgage.

Has anyone had a mortgage application denied because of large 401k contributions? Is there a work-around for this? Help!


EDIT: Forgot to mention that I am a self-employed sole proprietor.
In most cases, 401k assets are not touchable if you file for bankruptcy. A lender doesn't care what assets you have. Lenders care about what assets you have -- that they can actually collect if you stop paying your mortgage.
Hmm. Well actually about 100k is in a brokerage account, which we also provided a statement for.
Mike Scott
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Re: Mortgage application denied due to large 401k contribution?s

Post by Mike Scott »

As self employed, they may be counting the $1000 per month as gross income which will not get you very far.
Topic Author
rudeboy
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Re: Mortgage application denied due to large 401k contribution?s

Post by rudeboy »

Mike Scott wrote: Tue Apr 13, 2021 2:45 pm As self employed, they may be counting the $1000 per month as gross income which will not get you very far.
Yes that's the issue. After 401k contributions, my AGI is $1000/month. I had no idea that would be a problem, and am totally floored. I'm hoping someone will know something I can do to work around the issue.
Independent George
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Re: Mortgage application denied due to large 401k contribution?s

Post by Independent George »

rudeboy wrote: Tue Apr 13, 2021 2:28 pm Hello,

I just learned that my mortgage application has been denied because my 401k contributions have brought my AGI, and therefore my debt-to-income ration to 90% (aside from the mortgage, est. $750/month, my debt was a $60 credit card balance). The past 2 years I've had ~68k gross income and ~14k expenses. However, I've contributed so much to my individual 401k that my AGI has been about 1k/month. Without the 401k contributions, I would have comfortably qualified for the mortgage.

Has anyone had a mortgage application denied because of large 401k contributions? Is there a work-around for this? Help!
I'm having trouble getting your math to work - your AGI should be nowhere near $1k/month ($12k/year). 68,000 gross income - 19,500 401k (I assume traditional) - 6,500 insurance/healthcare = $42,500 AGI ($3,542/month). If you're single, less the standard deduction, that should put you squarely into the 12% Federal tax bracket. I don't know what state you live in, but your net income should be somewhere around $36,000/year, or $3,000 per month. Unless you have an absurd car or student loan payment, that's plenty of income for a $750/month mortgage payment.
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anon_investor
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Re: Mortgage application denied due to large 401k contribution?s

Post by anon_investor »

rudeboy wrote: Tue Apr 13, 2021 2:48 pm
Mike Scott wrote: Tue Apr 13, 2021 2:45 pm As self employed, they may be counting the $1000 per month as gross income which will not get you very far.
Yes that's the issue. After 401k contributions, my AGI is $1000/month. I had no idea that would be a problem, and am totally floored. I'm hoping someone will know something I can do to work around the issue.
I assume you do not have a W-2. I know that some lenders will just not approve folks without W-2 income (probably just easier for their underwriters).
JBTX
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Re: Mortgage application denied due to large 401k contribution?s

Post by JBTX »

Independent George wrote: Tue Apr 13, 2021 2:50 pm
rudeboy wrote: Tue Apr 13, 2021 2:28 pm Hello,

I just learned that my mortgage application has been denied because my 401k contributions have brought my AGI, and therefore my debt-to-income ration to 90% (aside from the mortgage, est. $750/month, my debt was a $60 credit card balance). The past 2 years I've had ~68k gross income and ~14k expenses. However, I've contributed so much to my individual 401k that my AGI has been about 1k/month. Without the 401k contributions, I would have comfortably qualified for the mortgage.

Has anyone had a mortgage application denied because of large 401k contributions? Is there a work-around for this? Help!
I'm having trouble getting your math to work - your AGI should be nowhere near $1k/month ($12k/year). 68,000 gross income - 19,500 401k (I assume traditional) - 6,500 insurance/healthcare = $42,500 AGI ($3,542/month). If you're single, less the standard deduction, that should put you squarely into the 12% Federal tax bracket. I don't know what state you live in, but your net income should be somewhere around $36,000/year, or $3,000 per month. Unless you have an absurd car or student loan payment, that's plenty of income for a $750/month mortgage payment.
I think the 68 is gross business revenue over two years, less $14k of business expenses = $54k over 2 years or $27 income per year. Or something like that.
Topic Author
rudeboy
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Re: Mortgage application denied due to large 401k contribution?s

Post by rudeboy »

Independent George wrote: Tue Apr 13, 2021 2:50 pm
rudeboy wrote: Tue Apr 13, 2021 2:28 pm Hello,

I just learned that my mortgage application has been denied because my 401k contributions have brought my AGI, and therefore my debt-to-income ration to 90% (aside from the mortgage, est. $750/month, my debt was a $60 credit card balance). The past 2 years I've had ~68k gross income and ~14k expenses. However, I've contributed so much to my individual 401k that my AGI has been about 1k/month. Without the 401k contributions, I would have comfortably qualified for the mortgage.

Has anyone had a mortgage application denied because of large 401k contributions? Is there a work-around for this? Help!
I'm having trouble getting your math to work - your AGI should be nowhere near $1k/month ($12k/year). 68,000 gross income - 19,500 401k (I assume traditional) - 6,500 insurance/healthcare = $42,500 AGI ($3,542/month). If you're single, less the standard deduction, that should put you squarely into the 12% Federal tax bracket. I don't know what state you live in, but your net income should be somewhere around $36,000/year, or $3,000 per month. Unless you have an absurd car or student loan payment, that's plenty of income for a $750/month mortgage payment.
You missed the 14k in expense write offs (and I also forgot to note HSA contribution of $3500) which brings AGI from $42,500 figure to $24,500. Edit: these number are just for last year, but were about the same as the year before.
brian91480
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Re: Mortgage application denied due to large 401k contribution?s

Post by brian91480 »

[/quote]

In most cases, 401k assets are not touchable if you file for bankruptcy. A lender doesn't care what assets you have. Lenders care about what assets you have -- that they can actually collect if you stop paying your mortgage.
[/quote]

Hmm. Well actually about 100k is in a brokerage account, which we also provided a statement for.
[/quote]

Good to know... but... the $500,000 in retirement assets really isn't applicable. So get that number out of your mind.

Current wages + brokerage accounts is what they'll look at.
niceguy7376
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Re: Mortgage application denied due to large 401k contribution?s

Post by niceguy7376 »

How long have you been self employed?
What they care is what is your take home and they were right in not feeling confident that you dont take home much. What is the loan amount?
Topic Author
rudeboy
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Re: Mortgage application denied due to large 401k contribution?s

Post by rudeboy »

niceguy7376 wrote: Tue Apr 13, 2021 3:08 pm How long have you been self employed?
What they care is what is your take home and they were right in not feeling confident that you dont take home much. What is the loan amount?
Self-employed since 2015. Loan amount is $208,000.
Beach
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Re: Mortgage application denied due to large 401k contribution?s

Post by Beach »

Putting money in a 401K is voluntary. As in you can voluntarily quit contributing.

I don't understand why the underwriter is taking away your income in their calculation...they are supposed to calculate your income on Gross.
notmyhand
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Re: Mortgage application denied due to large 401k contribution?s

Post by notmyhand »

Where on your tax return are you listing your 401k contributions?
Topic Author
rudeboy
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Re: Mortgage application denied due to large 401k contribution?s

Post by rudeboy »

notmyhand wrote: Tue Apr 13, 2021 3:26 pm Where on your tax return are you listing your 401k contributions?
1040 -->Part II: Adjustments to Income --> Item 15: Self-employed SEP, SIMPLE, and qualified plans.
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Kenkat
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Re: Mortgage application denied due to large 401k contribution?s

Post by Kenkat »

If your AGI is $1000 per month, where will the money for the mortgage payment come from?
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rudeboy
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Re: Mortgage application denied due to large 401k contribution?s

Post by rudeboy »

Kenkat wrote: Tue Apr 13, 2021 3:34 pm If your AGI is $1000 per month, where will the money for the mortgage payment come from?
From the 19k savings surplus I've been dumping into a 401k year after year.
babystep
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Re: Mortgage application denied due to large 401k contribution?s

Post by babystep »

rudeboy wrote: Tue Apr 13, 2021 3:42 pm
Kenkat wrote: Tue Apr 13, 2021 3:34 pm If your AGI is $1000 per month, where will the money for the mortgage payment come from?
From the 19k savings surplus I've been dumping into a 401k year after year.
You won't be contributing to 401k or maybe much less and instead using that money to pay the mortgage?

Does the lender know this?

How much is the down-payment?
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Re: Mortgage application denied due to large 401k contribution?s

Post by FrugalProfessor »

babystep wrote: Tue Apr 13, 2021 4:08 pm
rudeboy wrote: Tue Apr 13, 2021 3:42 pm
Kenkat wrote: Tue Apr 13, 2021 3:34 pm If your AGI is $1000 per month, where will the money for the mortgage payment come from?
From the 19k savings surplus I've been dumping into a 401k year after year.
You won't be contributing to 401k or maybe much less and instead using that money to pay the mortgage?

Does the lender know this?

How much is the down-payment?
First off, congrats on your impressive savings rate and low expenses!

How are you planning on accessing your $500k 401k balance to make future mortgage payments (e.g. roth conversions with 5-year seasoning)?

Given two otherwise identical borrowers (same gross income, 401k balance, non-retirement liquid savings, etc), I think it makes sense for a lender to prefer the one with more future liquidity. How would a lender gauge your future liquidity? By extrapolating your recent cash flows. By socking away so much in a 401k recently (which is generally a great idea), you're sending a negative future liquidity signal to your lender.

Solution: hopefully communicate to your lender your intended plan to access your $500k of 401k money. If they don't find this persuasive, then tone down your 401k contributions and reapply in the future.
I blog here: https://www.frugalprofessor.com/
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rudeboy
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Re: Mortgage application denied due to large 401k contribution?s

Post by rudeboy »

FrugalProfessor wrote: Tue Apr 13, 2021 4:22 pm
babystep wrote: Tue Apr 13, 2021 4:08 pm
rudeboy wrote: Tue Apr 13, 2021 3:42 pm
Kenkat wrote: Tue Apr 13, 2021 3:34 pm If your AGI is $1000 per month, where will the money for the mortgage payment come from?
From the 19k savings surplus I've been dumping into a 401k year after year.
You won't be contributing to 401k or maybe much less and instead using that money to pay the mortgage?

Does the lender know this?

How much is the down-payment?
First off, congrats on your impressive savings rate and low expenses!

How are you planning on accessing your $500k 401k balance to make future mortgage payments (e.g. roth conversions with 5-year seasoning)?

Given two otherwise identical borrowers (same gross income, 401k balance, non-retirement liquid savings, etc), I think it makes sense for a lender to prefer the one with more future liquidity. How would a lender gauge your future liquidity? By extrapolating your recent cash flows. By socking away so much in a 401k recently (which is generally a great idea), you're sending a negative future liquidity signal to your lender.

Solution: hopefully communicate to your lender your intended plan to access your $500k of 401k money. If they don't find this persuasive, then tone down your 401k contributions and reapply in the future.
Thank you! I won't need to access what is in the 401k currently because I can scale back my retirement contributions going forward. I've been maxing out my retirement accounts, which I can obviously stop doing any time. And in the event that I would need to access the retirements fund... it's my money that I can take anytime, albeit with a penalty. I really don't understand it.
Last edited by rudeboy on Tue Apr 13, 2021 4:32 pm, edited 1 time in total.
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Kenkat
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Re: Mortgage application denied due to large 401k contribution?s

Post by Kenkat »

babystep wrote: Tue Apr 13, 2021 4:08 pm
rudeboy wrote: Tue Apr 13, 2021 3:42 pm
Kenkat wrote: Tue Apr 13, 2021 3:34 pm If your AGI is $1000 per month, where will the money for the mortgage payment come from?
From the 19k savings surplus I've been dumping into a 401k year after year.
You won't be contributing to 401k or maybe much less and instead using that money to pay the mortgage?

Does the lender know this?

How much is the down-payment?
Yeah, I think you should try to go back to the lender and tell them you are cutting the 401k contribution to $x and see if that is enough to satisfy the income requirement.
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Nate79
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Re: Mortgage application denied due to large 401k contribution?s

Post by Nate79 »

Sounds like you are buying a house you can't afford with your current income regardless of retirement contributions and HSA.
Topic Author
rudeboy
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Re: Mortgage application denied due to large 401k contribution?s

Post by rudeboy »

Nate79 wrote: Tue Apr 13, 2021 4:36 pm Sounds like you are buying a house you can't afford with your current income regardless of retirement contributions and HSA.
How so? Before retirement contributions, the mortgage payment would be less than 1/4 of monthly income.
ajcp
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Re: Mortgage application denied due to large 401k contribution?s

Post by ajcp »

What rate are you getting? 750 sounds low for a $208,000 loan.
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