Do funds in a 401k plan count as cash reserves?

[Jennifer Hamon]

I live in a HCOL area (Boston) and am aiming to get started on a house hack next year. My situation is perhaps a little unusual in that I have a relatively new big tech job where about 50-60% of my compensation is coming from variable sources (RSUs, bonus, ESPP, etc) but I'm told lenders won't consider those forms of variable income until you have a few years of historical earnings for them to mull over. This means I am able to save a large downpayment but am constrained by DTI. By next summer I will have a substantial amount of investable liquidity for a first time buyer (likely $150-200k depending on how company shares perform) and no other debt but still a relatively low lendable income on paper for this area ($155k/yr). Small MFRs in transitional Boston neighborhoods appear to commonly sell in the 800k's. I think I may be able to acquire one of these by going out to the very limits of allowable DTI ratio if I bring enough cash to the table.

Taking the example of an $850k property with $170k down to avoid PMI, I'd need to finance the remaining $680k. That's near the absolute limit of what I think somebody might lend on $155k/yr gross income at current rates. It's not as reckless as it sounds if you consider that I have all the variable income coming on top that isn't considered in the loan application process.

Aside from the cash I plan to use for down + closing costs, a large fraction of my current net worth is tied up in my 401k plan. I'm reluctant to touch any of that money for the down payment, but I'm wondering if lenders will typically consider funds held in the 401k to count as cash reserves? They are not as liquid as cash in the bank but in an emergency I could definitely borrow from my 401k to cover the mortgage. Getting some clarity on this would help me model how much of my future cash-on-hand I will need to hold back as reserves instead of putting them toward down and closing costs.