401K Contributions as payment shock

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  • #49065

    Has NACA eliminated the option of using your 401K contributions as payment shock? I understand that I must agree to stop contributing to my 401K plan after I’ve received the loan, but is this still an option? I contribute almost $400 a month to my 401K and I want to use that plus what I pay in rent as my approved amount. That payment is well under my 31% approval amount, but the underwriting approved my for a much lower amount and stated that I can ask for an increase after showing a payment shock. The 401K contributions would be the payment shock. I’m not sure if my MC is not explaining this or the underwriting is not interpreting it correctly. My MC said he submitted it the way I asked and that was the result.
    Here’s a breakdown of the numbers
    Rent=$1284
    Monthly income= $7,000.00
    31% of monthly income= $2,170.00
    40% of monthly income= $2,800.00
    Total debt= $871.74
    Monthly 401K contributions = $388.00
    I want to be approved for a payment amount of $1,671.00
    Am I missing something? Is there anyone that I can reach out to additionally for help with this?

    @TTrumble
    any words of advice?
    Thanks for any assistance!

    #49066

    Update: The office manager responded with the following:
    Unfortunately we cannot use the 401 K contributions for payment shock savings, this mainly because you already have an open 401K Loan. (NACA does not approve to obtain a loan to pay debt, instead a hardship withdrawal would have solve the debt issue).

    Unless the current loan be paid in full we can explore the option for use part of the funds contributions as payment shock

    The main challenge in your file is we don’t see real savings. In order to request an increase you must demonstrate 3 consecutive months payment shock savings for the difference you want to qualify for. You must continue updating your file every month.


    @ttrumble
    is this accurate? Am I unable to use my 401K contributions as payment shock because I have a 401K loan out? The 401K loan repayment is deducted from my check, but I contribute an additional $388.00 a month to my 401K outside of the repayment amount. I’ve been contributing that amount all year without missing a payment. Please advice!

    #49112
    TTrumble
    Member

    Hello 2019homeowner,

    The office manager is correct that we cannot use your 401K contributions toward Payment Shock as long as you have an outstanding loan against the 401K.

    Personally, I discourage using the 401K contribution for Payment Shock savings anyway. It’s far too dangerous a situation in the long term. You will indeed have to stop your contributions upon closing. At that point you have begun to put your retirement in jeopardy. If your income does not increase sufficiently to re-start the contributions within a year, statistically there is a much greater possibility that you will not restart them at all. Even if you do restart further down the line, missing more than a year will cause a very large decrease in the amount of money you will have available at retirement.

    The secret to the success of a 401K is its long-term compounded growth, not just consistent contributions. The more you miss out on contributing, and especially the earlier in life you miss out, the greater the damage is magnified. Especially in your 20’s, 30’s or 40’s, halting 401K contributions can cause a huge decrease in funds available at retirement.

    It has the potential to give you a retirement in a wonderful house, but not able to afford to do anything other than sit in the house and let time pass, that is if you can afford to retire at all. You could be setting yourself up to be a house-poor senior citizen. Better to have a little less house and a more enjoyable retirement. Again, that is personal opinion, but the numbers bear me out.

    In short, the fact that we cannot use the 401K contribution may actually be a blessing in disguise.

    I hope that helps clarify things.

    Tim Trumble
    Online Operations, NACA
    ttrumble@naca.com

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