401(k) loan or family loan okay for down payment?

[Kevin C.]

Assuming good credit and income could I get a mortgage on a rental by using a 401(k) loan as the 20% down payment? What about a private loan from a family member? 

[Chris Mason]

Hi @Kevin C.,

401k loan, yes. 

Unsecured loan from family, no. 

Gift from family, yes - if it's a property you will owner occupy.

401k loan as a means to get started is actually great for a few reasons, that I will take this opportunity to plug because for some reason not a lot of people talk about this. 

• Your employer matching funds, unbeknownst to them, was actually your employer matching your down payment funds! If you asked for a raise just to help you save up a down payment, your employer would probably say "lol, no." This is where you can jack up your 401k contribution to the max that your employer will match, in order to say "How about YES to that pay raise for my down payment savings, Mr Employer? And you didn't even realize it! TYVM."
• Tax advantaged.
• Paying interest back to yourself... there are worse things in life than owing your own retirement account money, and your retirement account collecting interest from yourself.
• In our mortgage math, we don't count 401k loan payments against you for DTI purposes. This is the only type of loan where we will not count the payment against you.
• Talk with your 401k people ahead of time, before altering your retirement/savings strategy in any way. I'm not a 401k expert, and there are restrictions that apply to how much you can pull from the 401k without the tax man coming after you.