Does a plan’s administrator take the participant’s word for it that a loan will be used to acquire the participant’s principal residence?

Many § 401(a)-(k), § 403(b), and governmental § 457(b) plans distinguish between participant loans with a repayment period no more than five years and those used to acquire the participant’s principal residence.

If a participant’s request for a loan asks for a repayment period more than five years:

Does a plan’s administrator (or a service provider acting for it) accept the participant’s written statement, made under penalties of perjury, that the loan will be used to acquire the participant’s principal residence?

Or, does a plan’s administrator require some evidence independent of the participant’s statement?

If so, what substantiation does an administrator or its service provider require? A mortgage commitment? A purchase agreement? Something else?

If a plan’s procedure requires independent evidence, does this mean a claim must be submitted in paper form? Or does a service provider’s software allow uploading pdf files for the independent evidence?

In your experience, what percentage of plans process a principal-residence loan by relying on the participant’s written statement, seeking no independent evidence?

One shortcut is to transfer the loan proceeds to the closing escrow for the house.  This is also a procedure for a hardship distribution for purchase of principal residence,  with the advantage that if the transaction  does not close, I believe the unwinding of the escrow by return of the funds obviates the question about "reversing" the distribution - the distribution is contingent and does not occur. Is it a principal residence? I will leave that to others.

QDROphile, thank you for your kind help.

Other observations? Other methods?

If we allow a § 401(k) or § 403(b) participant to self-certify her hardship (with only a pledge to furnish substantiation later, if asked), should we allow a participant to self-certify that she will use her loan to acquire her principal residence?

No, they should be able to provide a copy of the offer showing at least the loan value will be paid in cash.  If it's financed, then almost assuredly the mortgage company will ask for a letter of explanation as to the source of the funds.  And if close to closing, the closing agreement/reconciliation should show the loan as either itself as a source of funding, or the participant bringing at least that much cash.

I think the PA still needs to prudently act like a commercial lender; hardship doesn't get repaid, so self-certify made sense since ability to repay is not relevant, and an employee's personal needs are not the business of the sponsor.

Nate S, thank you for your helpful observations.

Agree with Nate S.--in fact, the mortgage company or bank will in our experience be absolutely detail-anal in requesting documentation as to where the amount came from, to that point, even statements from 60-90 before showing where it came from. Just went through that a month ago for a client.

Sorry this is so late, but all the custodians I have worked with wanted at least an offer to purchase letter, or a copy of the contract.