This is a brief reminder to those who already know this information and a short tutorial for those that don’t. PLEASE do not assume that your client has done their homework when it comes to using funds from retirement plans. So many people know just enough to get themselves in real trouble, then find themselves frantic right before closing trying to get the money, or worse yet, finding out they can’t take out the money from the plan for any number of reasons!
You should always advise a client to speak to a CPA long before they even get pre-approved for a loan. There are different potential issues and tax consequences from taking the money out, as well as HOW you take the money out!
After you understand the potential issues with removing the money, how much money you remove, how you remove it, if you have to repay it, the taxes and penalties that may come due at certain levels of removal, and what kind of account you are removing it from.
The next question is to talk to the benefits manager of the account or accounts you may be taking money from. All accounts are not the same, all may have different rules and timelines to receive the money, and all of this must be coordinated so you are not chasing a long paper trail of documentation!
Another area to consider is the possibility of removing money from more than one plan and the possibility that less is more; but also that more is more! What I mean is that you may benefit by removing as little money as possible just to make things work, or you may benefit by taking out MORE money to lower the loan to value or to reach up for a slightly more expensive home!
Last but not least is to understand the dynamics of the transaction with your deal so you can really look at all the options. In today’s market we have all kinds of people buying houses together and sometimes you have two first time homebuyers who are not married buying a house together. This is yet another area you MUST address early with the client, the accountant, and maybe even an attorney before moving forward.
As always it is important to get the plan worked out before the client gets out looking for a house. Once they hit the market, any delay or missed opportunity could really be costly. So be ready to coach your clients through the process. Have a CPA and possibly an attorney on hand to refer your clients if they should need a referral. Getting people out in front of this issue and being in a position to explore all the options is what makes you a trusted professional!
The last thing anyone wants in a real estate transaction are surprises. Prevent that with some proactive research and connecting with the math before issuing that pre-approval letter! Remember, it’s not just simply pulling the money out of an account; there are many things to understand before that happens.
Questions or comments: [email protected]