Retirement Account Contributions and Mortgage Loan Qualification

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I know 401k contributions impact a persons Adjusted Gross Income, thus would it also affect the amount a person could qualify for? If so, I will delay enrollment for a few months...

This depends upon what documentation you use to qualify. For most of those who are salaried or hourly W-2 employees, debt to income ratio is calculated using gross pay from w-2s and pay stubs. This is more more than half of the people out there. For these people, it doesn't matter, because the computation is based upon gross pay before any deductions - even withholding. The thinking goes that you can always stop retirement contributions if you need the money now to afford your mortgage .

For those who have to use the full federal tax forms to qualify however, the computation is based upon Adjusted Gross Income. This is basically three groups: The self-employed, commissioned sales people, and construction trades, the last being notorious for periods of unemployment between the end of one project and finding another project that's hiring. Adjusted Gross Income, or AGI, is after retirement contributions from taxable income, as well as business expenses and several other things are deducted. The reason for this is those people have more expenses that statutory employees, whether those employees are cube farm dwellers, have a corner office, or whatever. Lenders are well aware of this. The only reason why they're willing to accept taxes as proof of income is very few people will tell the IRS they make more money than they do when it means paying so many cents of every dollar they didn't make in taxes.

This can make it very difficult for people in these three groups to qualify via documentable income. This is the reason why stated income loans were created. I don't like them, but there is a reason why they exist. The rates are higher and the underwriting requirements are tougher, but without that, some people would never be able to qualify for a home loan, no matter how credit-worthy. As I've said before, stated income is subject to abuse, and you'd really rather qualify "full documentation" if there's any way you can, especially now when lenders are suffering stated-income-phobia and it can mean having to come up with tens of thousands of extra dollars down payment and pay an interest rate that might be two full percent higher than people who can qualify full documentation will pay, and might not be able to find a lender who will lend them all of the money they need for the purchase.

So it will make a difference if you're one of those who needs to use tax forms, but if you're someone who can use w-2s to qualify, it shouldn't.

Caveat Emptor

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About this Entry

This page contains a single entry by Dan Melson published on April 15, 2008 7:00 AM.

Another Scam: "Negative Equity? Sell and Get Cash!" was the previous entry in this blog.

Links and Minifeatures 2008 04 15 (A date which lives in infamy - every year!) is the next entry in this blog.

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