***update #2 in post #1*** 401k loan being considered in lieu of bridge loan. Please let me know your thoughts

[clh2]

***UPDATE***
My daughter and son-in-law did make an offer, with only a financing contingency. It was only valid for today, as my daughter will not get into a bidding war. It was slightly over list price, by 1.5%. There was at least one other offer.

The offer my DD/SIL submitted was accepted. I’m not sure which financing offer they are going to go with…

But the exciting news for me, they are moving about 8 minutes closer.
Granted, not a huge amount of time, but there have been many times they considered moving about 90 minutes away. And since I love seeing my grandsons…this is awesome!

***end of the 1st update***
****2nd Update:
They opted to not do a 401k loan. While loans from a 401k are an option from their company, there is no option to prepay the loan. (This is a decision that the company administrator made when the 401k loan is set up.). So while a loan is possible, they would have needed to set it up for 5 years, with biweekly payments. The loan could have been set up for a shorter payment period, but then their paychecks would have been reduced according in the short term Again, the only prepayment “option” is to quit.

So…they are getting a bridge loan, which is a $500 in fees, and they only need to pay the monthly interest on the loan, and when the house sells, the loan is repaid, as well as the extra couple of months of the extra mortgage. So, this was the option that lets them sleep at night.
*****end of second update****
_______________________________________________________
Hello…this is related to our daughter and son-in-law.

They own a small starter home, and have outgrown it now that the have 3 boys (5, 3 and 1) and both of them work from home.

In the area we live in, bigger homes do not last long when they come on the market, usually under contract within 3-4 days.

A house just came on the market, and my daughter loves it. In cash, they have 35% of what they need for their downpayment. The rest ultimately would come from the equity in their home, once it sells.

They talked to their realtor briefly yesterday, and she is telling them that home selling now rarely comes with contingencies Ie for selling current house.

So, just looking for options to make this work! I know they could do a bridge loan. But there is also a cost associated with that process.

Another option…is they could each take out a 401k loan for $50k, and then pay it back with the interest into their 401k accounts. They are both work at the same company.

I know one of the downsides with this is if one or both of them would lose their job…very highly unlikely.
Paying 2 mortgages would be tight but doable for a couple of months.

What are other downsides of a 401k loan? If they had to pay back the loan with regular earned income, I know that is not a great deal, due to taxes. (Ie paying income tax on the money to pay back the loan, and then again paying taxes when the money is withdrawn). But…since this would be a short-term loan, getting paid off with house sale proceeds, this seems like a viable option.

Obviously, they will be talking to a mortgage loan officer tomorrow, but I’m looking for thoughts/ideas today! Thanks!

 

[FreeTime]

I would not do the 401k loan. If you miss a payment, if the statement never comes and you don’t pay as a result, etc they will quickly move to default and then it is taxable income.

A bridge loan that can stay open for years if I needed is the way to go.

Also, something to consider, I wish I had, that tight little house they may miss when the kids move out and the cost to downsize may end up being way more than what it would have been to keep that house. Do they have room for an addition?

 

[eticketplease]

Besides possibly losing their jobs and having to pay back the loan much sooner the biggest risk is the opportunity cost of the loan money not continuing to grow.

I'm not in the market but have they maybe looked at getting a HELOC on their starter house? The rates may be competitive with the 401K loan and would be paid after the starter house is sold. Just look for ones that don't have prepayment penalties.

 

[DisneyTexan]

the biggest risk is the opportunity cost of the loan money not continuing to grow.

This is my thought also. There is the cost of the interest expense on the loan, plus the "unrealized cost" of the lost earnings. However, those lost earnings don't feel all that material to someone who is young.

Another option…is they could each take out a 401k loan for $50k, and then pay it back with the interest into their 401k accounts.

You might know this already -- the interest expense on the loan doesn't go back into their accounts. Think of the interest expense as an administrative fee.

Best wishes for the house search! It will be an exciting time.

 

[grepes]

Reno on the starter home out of the question? I also like the idea of a HELOC on the starter to buy a 2nd home... starter sized home would be easier to rent too if they could keep both.

 

[Simba's Mom]

No advice, really, but we did this exact same thing when we bought our current house. We fell in love with this house, but our existing house hadn't sold. We got a bridge loan, and handled everything for a few months. The only bad news is that we'd figured we could handle it all for about 5-6 months. Well, about 4 months later, DH started having sleepless nights and feelings of desperation. However, our house finally sold at exactly 6 months. When we closed, the first thing we did was run to the bank and pay off the bridge loan. We were able to do that because we were downsizing-going from 3000 ft to 1850 ft. Everything was very easy.

 

[cvjw]

Can the parents loan/give the kids the extra money? That is what I would do.

 

[Mackenzie Click-Mickelson]

Around here generally it's more expensive to do renovations to a house, extensive enough that is, than to buy new. A lot does depend on how old the house is as you need to consider bringing up to code. Renovating a kitchen is not the same as adding square footage to increase the size of the house to accommodate growing out of it. Even our 2014 new build house likely has some things already not to present day code.

Frankly the costs sunk into the house my in-laws purchased a bit before the pandemic was not a smart choice. They would have been better off to have bulldozed the house and started new OR brought it all down to studs and started new rather than doing upgrades here and there, the largest being making the walk-out basement livable for one of the daughters and her husband to move in. This was also the same several years before the pandemic on my husband's grandmother's 1940s house as it would have cost several hundred thousand to expand slightly the house in square footage primarily due to bringing up to code.

Is the 35% of the down payment based off of 20% down payment? Granted we did new build but I honestly don't know anyone who has put 20% down in recent years. Granted it's a different situation than the OP's family because ours was about rent vs save to get that 20% but our financial advisor discussed with us about thinking about how long that could be and how increased costs could make that a never-ending chase to get to that as costs increase year over year.

 

[scard192]

Can the parents loan/give the kids the extra money? That is what I would do.

I am no expert, but my daughter and son in law were in the same situation and we told a parent may "gift" the money to a child, it can't be a loan.

 

[MICKIMINI]

My SIL and her husband took a bridge loan back in the late 1980's and it took forever (more than a year) for their house to sell. They were moving to a new construction. It all worked out, but they were really stressed out during that time. DH and I just could not do a bridge loan as we are scaredy cats.

As tough as it was, we were able to put in an offer for a new home last year with a contingency that our house would be listed within 7 days and under agreement within 30 days. We accomplished both goals and were able to move forward. The chance was the buyer could back out. We also gave the builder a 20K non refundable deposit (that was scary, though in the scheme of building it isn't but a drop in the bucket). We lived in a hotel for six months which was dreadful. We did something similar when our son was young, but lived in an apartment for six months during construction. We just couldn't do the hotel thing with our son, it would have been more than brutal!

Best of luck to them and I hope it all works out no matter which strategy they use!

 

[DisneyTexan]

I am no expert, but my daughter and son in law were in the same situation and we told a parent may "gift" the money to a child, it can't be a loan.

Technically the parents can loan money to their children. However, the mortgage company will want the repayment terms in writing. And its possible that those repayment terms will make the debt-to-income too high to qualify for the mortgage.

If the money is gifted, then there are possible IRS tax issues if the total from one married couple to two people exceeds $76,000 in 2025. That being said, people gift money all the time without notifying the IRS. The mortgage company might or might not "look the other way." https://www.nerdwallet.com/article/...e gift tax limit, also,for a total of $36,000.

 

[DCLMP]

Hello…this is related to our daughter and son-in-law.

They own a small starter home, and have outgrown it now that the have 3 boys (5, 3 and 1) and both of them work from home.

In the area we live in, bigger homes do not last long when they come on the market, usually under contract within 3-4 days.

A house just came on the market, and my daughter loves it. In cash, they have 35% of what they need for their downpayment. The rest ultimately would come from the equity in their home, once it sells.

They talked to their realtor briefly yesterday, and she is telling them that home selling now rarely comes with contingencies Ie for selling current house.

So, just looking for options to make this work! I know they could do a bridge loan. But there is also a cost associated with that process.

Another option…is they could each take out a 401k loan for $50k, and then pay it back with the interest into their 401k accounts. They are both work at the same company.

I know one of the downsides with this is if one or both of them would lose their job…very highly unlikely.
Paying 2 mortgages would be tight but doable for a couple of months.

What are other downsides of a 401k loan? If they had to pay back the loan with regular earned income, I know that is not a great deal, due to taxes. (Ie paying income tax on the money to pay back the loan, and then again paying taxes when the money is withdrawn). But…since this would be a short-term loan, getting paid off with house sale proceeds, this seems like a viable option.

Obviously, they will be talking to a mortgage loan officer tomorrow, but I’m looking for thoughts/ideas today! Thanks!

There’s is no risk to taking a 401k loan. They can set up automatic payments. They can also pay it back when they sell the first house.

 

[DCLMP]

This is my thought also. There is the cost of the interest expense on the loan, plus the "unrealized cost" of the lost earnings. However, those lost earnings don't feel all that material to someone who is young.


You might know this already -- the interest expense on the loan doesn't go back into their accounts. Think of the interest expense as an administrative fee.

Best wishes for the house search! It will be an exciting time.

The interest absolutely does go back into your account. You are borrowing from yourself and paying yourself currently 9% interest.

 

[QueenIsabella]

Technically the parents can loan money to their children. However, the mortgage company will want the repayment terms in writing. And its possible that those repayment terms will make the debt-to-income too high to qualify for the mortgage.

If the money is gifted, then there are possible IRS tax issues if the total from one married couple to two people exceeds $76,000 in 2025. That being said, people gift money all the time without notifying the IRS. The mortgage company might or might not "look the other way." https://www.nerdwallet.com/article/taxes/gift-tax-rate#:~:text=The gift tax limit, also,for a total of $36,000.

There aren't tax issues, but there IS a special form that you have to fill out if you do this. The overage (over $76k) counts towards your lifetime exemption, which is in the millions--sorry I have brain fog at the moment. No taxes would be owed, and it's likely that the parents will never hit the lifetime exemption anyway (unless they're rich, in which case, I hope they're doing some planning to reduce their taxable estate).

 

[eticketplease]

There’s is no risk to taking a 401k loan. They can set up automatic payments. They can also pay it back when they sell the first house.

No Risk? Please explain this thinking. I think many people would take $50K out if there was no risk.

 

[DCLMP]

No Risk? Please explain this thinking. I think many people would take $50K out if there was no risk.

It’s your own money. Many people do take out 401k loans. This is not some rare phenomenon. It actually pretty common. If you think you’re going to lose your job or quit then don’t do it. That is also dependent on the plan. Some plans will allow you to continue to make payments if you change jobs. I would always read the plan rules before doing anything.

 

[eticketplease]

It’s your own money. Many people do take out 401k loans. This is not some rare phenomenon. It actually pretty common. If you think you’re going to lose your job or quit then don’t do it. That is also dependent on the plan. Some plans will allow you to continue to make payments if you change jobs. I would always read the plan rules before doing anything.

Yes it is their money and many people do choose to take advantage of them but that doesn’t mean there is not a risk involved.

 

[clh2]

Can the parents loan/give the kids the extra money? That is what I would do.

In this case, no, we would not be able to do this. We would need to pull money out of either my or DH’s IRA, and pay taxes on that money. In addition, we would not want to do anything that impacts Medicare IRMAA brackets, for subsequent years.

if they needed 10-20k, for this to happen, that would be different. Due to needing to make the offer with no contingency for the sale of their house, they have plenty of equity in there home, they just need it to be liquid

 

[clh2]

Theirs is no risk to taking a 401k loan. They can set up automatic payments. They can also pay it back when they sell the first house.

Thanks for your comments. I think this is the route they will take. They will be taking to their mortgage person tomorrow, and get those opinions on whether a bridge loan or 401k loan makes more sense. Either way, as soon as their current house closes…the loan will be paid off.

 

[clh2]

Reno on the starter home out of the question? I also like the idea of a HELOC on the starter to buy a 2nd home... starter sized home would be easier to rent too if they could keep both.

I can’t even imagine how they could do renovations on their existing home. Or where they would live if they had a major renovation done.

I’m not sure they would want to be landlords.