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Qualifying Documentation for Residential Loan


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Hi, I have a participant that is requesting a residential loan but they will be building a home not purchasing a home.  Can this be done with a 401k loan?  and if they can, what documentation should we be requesting?  A contract with the contractor that is building the home?  I'm confident that the purchase of just the land parcel does not qualify for a loan and that is what they provided so far.  Thanks for any insight on these rules

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I'm not sure, but I would also get some sort of pledge that the home will be their primary residence if they want the loan to be more than 5 years.

(And the plan's loan policy will have to allow for home loans, too.)

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I don't know if reference to IRC 163 does anything because a participant loan is not allowed for a "substantial improvement" so why would IRC 163 support or not support a participant loan for a construction.  The loan rules stand on their own I think.  Therefore, with those rules being vague, the acquisition of and construction of a primary residence (both resulting in primary home acquisitions and mortgages) are rather similar with the end result being a dwelling to live in that they didn't have before so I'd believe you should be able to make an administrative interpretation and document it as such and allow the loan for the construction, as long as you confirm that they did ultimately live in the house.   

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