Ask The Experts: Money Matters

By Mike Miles

TSP loan and personal debt-to-income ratio

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Q. 1. I have $12,000 in student loans at about 6.5 percent interest rates. I had considered taking a loan from my Thrift Savings Plan account to pay off my balance as the interest rate I would pay back on the TSP loan is lower than my Stafford Loans. What is the maximum amount one can take out on loan from their TSP account? What is the repayment time frame demanded by TSP?

2. If I were able to pay off my Stafford loans with a TSP loan, I am not sure that would be the best decision. I am 26 years old and have approximately $15,000 in TSP. I know that money makes money over time and I can’t make up past years. If I take the funds out, I am losing some potential for the funds to work for me and increase themselves. Do I want to leave the money brewing where it is in the hopes it will bring more for my retirement, or take it out now and be debt-free and save myself some interest from my student loans. Are there any other factors that merit consideration?

3. I am looking into buying a house and want to know if a loan from my TSP account shows as part of my debt-to-income ratio. I have been considering taking out a TSP loan to pay down my student loans to lower my debt-to-income ratio to improve my home loan prequalification odds. Can you tell me if a TSP loan would be part of that ratio even though the loan is paid back to myself?

A. The maximum TSP general purpose loan amount is the smaller of 50 percent of your 12-month rolling average account balance or $50,000. The repayment period is five years, but you may reamortize the balance to extend the repayment term.

Whether or not you take the TSP loan depends upon a number of factors including the cost of the other debt, the cost of the TSP loan and your behavior.

You should check with your lender to see what, exactly, they count in underwriting your mortgage application. I suspect that they’ll want to consider all of your debt.

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Comments

  1. Pat M Says:
    July 1st, 2013 at 12:00 pm

    Pay off the student loans. The accumulating interest on them is a burden to you. The loan is from your own funds, and you are paying yourself back, with interest. At your age, you have decades ahead to earn more on your TSP. TSP does not report loans to credit agencies, so it wouldn’t show up as a debt unless you reveal it.

  2. admin@TSPallocation.com Says:
    July 3rd, 2013 at 12:38 am

    When you are deciding whether or not a TSP loan is appropriate in your circumstance, the key factors are: (1) you obtain a significant financial benefit (typically a very significantly lower interest rate by at least 10%), (2) the loan is held for only a short period of time; and (3) there is no reasonably affordable alternative.

    In the case of your Stafford loan, 6.5% is a reasonably affordable alternative, particularly when you factor in the tax deduction which you can take for the interest which you pay on that loan. There is, of course, no tax deduction available for the interest on a TSP loan.

    With respect to your concern about whether or not a TSP loan would be a factor in obtaining a mortgage, note that TSP loans do not appear on your credit report or reflect on your credit score. That is because even though the TSP calls it a loan, it really is not one. You are borrowing the money from yourself – just temporarily pulling it out of your retirement savings, but you always have the option of doing an inservice withdrawal of those same funds so it is not really a debt. Mortgage lenders are very familiar with 401K loans, which are similarly treated and and not a factor in mortgage qualification.