I’m currently working on refinancing my home due to a divorce and need some advice. I have a $13k balance on my car loan with a $300 monthly payment. I’m considering using a 401k loan to pay it off. My questions:
Will paying off the car loan with a 401k loan affect my credit report?
Could this help me qualify for a larger mortgage since it removes the car payment from my debt-to-income ratio?
I want to present a clean slate to the lender when they review my application. I need to refinance to remove my ex from the mortgage and keep the house. Any input would be appreciated!
As a mortgage professional, my advice is not to pay off the auto loan until you’ve spoken with your lender. It can take time for the payoff to reflect on your credit report. Instead, consider using equity from your home during the refinance to pay off the car loan. This could lower your overall monthly payments compared to managing a separate 401k loan and mortgage payment.
Before making any decisions, consult with a loan officer. You might not even have a debt-to-income issue. Jumping to the 401k loan might be unnecessary.
Dai said:
Before making any decisions, consult with a loan officer. You might not even have a debt-to-income issue. Jumping to the 401k loan might be unnecessary.
I’m switching from dual to single income, and the refinance will need to cash out equity to pay my ex. I estimate my DTI will be 30-40%, so I’m trying to improve my chances of qualifying.
Dai said:
Before making any decisions, consult with a loan officer. You might not even have a debt-to-income issue. Jumping to the 401k loan might be unnecessary.
The car loan is tied to my ex, so I need to refinance or pay it off to remove them. A coworker suggested the 401k loan to avoid a higher interest rate. Divorce situations complicate everything!
If you use a 401k loan, the lender might ask where the funds came from and request a repayment schedule. This could still factor into your DTI calculations.
At this point, I think I’ll just be upfront with the lender. Paying off the car loan with the 401k loan accomplishes the goal of removing my ex from the auto loan, but I’ll discuss the option of rolling it into the refinance as well.
Contact a few brokers or local credit unions for advice. They can run your scenario through automated underwriting systems and give you clear answers. Too many variables here to get definitive advice online.
Be cautious—paying off a car loan could temporarily drop your credit score, which might affect your mortgage terms. My score dropped 86 points when I paid off my car.
Since a 401k loan is against your own assets, it typically isn’t factored into your debt-to-income ratio. So yes, it might help in qualifying for a mortgage.