Security for Loan to Acquire Primary Residence

[Oh so SIMPLE]

Plan has a loan program that limits the amount that may be borrowed to 1/2 of the vested balance, and requires a pledge of the vested benefits as security for loans.

The loan program requires 5 year repayment period, unless to acquire a primary residence. Then it may be longer.

If the loan repayment period is longer than 5 years, i.e. to purchase a primary residence, must the loan be secured by a mortgage on the primary residence being purchased or will a pledge of the vested benefits be sufficient?

[masteff]

No security interest in the home is required. It's just like a normal plan loan except you use proof of home purchase to substantiate allowing the longer loan term.

[Kimberly S]

If the loan is not secured by the home, the interest is probably not deductible as mortgage interest.

[masteff]

If the loan is not secured by the home, the interest is probably not deductible as mortgage interest.

Correct. IRS Pub 936 says as much ( http://www.irs.gov/pub/irs-pdf/p936.pdf ). It also requires that the debt instrument "is recorded or is otherwise perfected under any state or local law that applies."

Of course my sticking point is "You must be legal liable for the loan. ... there must be a true debtor-creditor relationship between you and the lender". I'm unclear on whether this is met in the case of a 401(k) loan.

[Guest mjb]

If the loan is not secured by the home, the interest is probably not deductible as mortgage interest.

Under IRC 72(p)(3) interest on a loan from a 401k plan secured by a mortgage on a home is not deductible if the borrower is either a key employee or the funds borrowed on the loan are derived from elective contributions under 402(g). However a loan from a qualfied plan is permitted for more than 5 years as long as the loan is used to acquire a home for the participant within a reasonable time after the loan is made regardless of whether interest is deductible.

[masteff]

Under IRC 72(p)(3) interest on a loan from a 401k plan secured by a mortgage on a home is not deductible if the borrower is either a key employee or the funds borrowed on the loan are derived from elective contributions under 402(g).

Those two additional factors would explain the vagueness and contradiction of several web articles on the subject (I basically found "yes", "no" and "maybe").