Pretty simple question I think. I invest about 25% of my income each month into my 401k/Roth/other investments. $130k a year salary, so just under $100k after the investments. I have a good saving amount right now and am planning on looking at houses in the next month or two.
Do lenders look at gross salary when looking at income? If not, does it make sense to stop investing at such a high rate for a few months so my salary looks more accurate? I’m just worried my investments will affect my ability to afford a house when actually such heavy investments are just a choice I’ve made and I could reduce them a bit to say 15%.
Pause 401k for buying a house
byu/FiendingForRanch inpersonalfinance
Posted by FiendingForRanch
9 Comments
Are you trying to buy the absolute max amount of house you qualify for?
a) why are you looking to buy a house
b) run the numbers on continuing to rent vs buying whatever house you’re planning to buy
c) run the d*mn numbers again with every phantom cost of owning a house
They look at gross earnings not take home pay. So your investments are fine.
I’m no expert but I think common advice is not to pause altogether, but rather drop contributions to at least get the employer match
Stop investing in the event you need to build up cash reserves. Lenders (underwriters) look at salary and current debt obligations (credit line and cyclical repayment history).
Translation: If you can’t make your mortgage payments, you’re going to give up contributing to your 401k before you give up your house. They’re only trying to predict your risk, the odds that you can’t fulfill your mortgage payment.
TLDR: they want to make sure no matter what you are doing with your money, they can take what’s theirs by chewing you up and spitting you out regardless of what type of account it is in.
They look at your income as a whole. Not where you are dividing it up when it comes to savings and investments.
Your income matters when it comes to longevity as well as your debts for which that income is required to pay off over time.
Lowest amount of risk for them to ensure your ability over time and in worst case, they get as much back as they can if you default by looking across all of your assets
The 28/36 rule when I bought a house was that PITI (&hoa) should not exceed 28% of gross monthly income. Total installment debt (including the mortgage) should not exceed 36%.
However, that was a long time ago. I think the banks have relaxed those numbers somewhat over the years. And they probably look at overall net worth and risk assessment in the mix. I suspect the decisions are cyclical and vary based on a number of factors.
edit: and for installment debt, its the minimum payment not the amount you typically pay.
For the last year I’ve reduced my retirement contributions to start building up more cash to buy a home. I’m finally at a point where I can cover the down payment and closing costs and still have an emergency fund for any house issues.
It pained me to watch my retirement account growth slow down but now that I have enough cash to buy a house I can say it was definitely worth it.
the house is debt that begins to turn around before the 30 yr mark (inflating cost of housing). You could play w/the retirement contributions off of the house/housing cost and come back to the hi rate you now contribute. On the other hand, many do not think of housing as investment but asa home. THAT is priceless