TSP Loan for down payment - turnaround time

[elspouse]

Am looking to buy a house and want to fund part of the down payment with a TSP loan. I need it more as a bridge (expect to repay within 2 years) but may want to take it as a residential loan as the lender does count the payments against my D-I ratio so longer repayment period means lower D-I. I'm married so need to submit the loan app on paper with spouse's signature.

I was wondering how long, in setting a closing date, I should allow for receipt of the loan proceeds? Would it take longer if I'm applying for a residential loan because someone needs to also look over the sales contract to ensure I qualify for the loan?

Thanks for any info

 

[Scout333]

Am looking to buy a house and want to fund part of the down payment with a TSP loan. I need it more as a bridge (expect to repay within 2 years) but may want to take it as a residential loan as the lender does count the payments against my D-I ratio so longer repayment period means lower D-I. I'm married so need to submit the loan app on paper with spouse's signature.

I was wondering how long, in setting a closing date, I should allow for receipt of the loan proceeds? Would it take longer if I'm applying for a residential loan because someone needs to also look over the sales contract to ensure I qualify for the loan?

I used a residential TSP loan as a bridge a couple of years ago while waiting on our first house to close. Seems that it took about three weeks to process. Was able to fax some of the paperwork and selected EFT deposit as the option for receiving the money. You can get more info re TSP Loan Booklet. I remember it being a fairly stress free process. Just a tip. Pay back as quickly as you can. There are pretty significant tax costs if you leave government service before it is repaid. So, not too good for a long term loan. JMHO Good luck.

 

[elspouse]

Thanks for the info. We prepared the application online, then printed it out and faxed it in with supporting documentation on Thursday, July 30. The following day it was entered into the system with a "processing status." By yesterday (Tuesday 8/5), it showed as approved as of 8/4. Today the money was DD'd into my bank account.

So less than a week turnaround. I was told, however, that processing can take 7-10 business days and the direct deposit another 3-5.

 

[BowmanPG]

I used a residential TSP loan as a bridge a couple of years ago while waiting on our first house to close. Seems that it took about three weeks to process. Was able to fax some of the paperwork and selected EFT deposit as the option for receiving the money. You can get more info re TSP Loan Booklet. I remember it being a fairly stress free process. Just a tip. Pay back as quickly as you can. There are pretty significant tax costs if you leave government service before it is repaid. So, not too good for a long term loan. JMHO Good luck.

TIAA loan or TSP loan


--- calculation of interest rate and hidden charge​

I. TIAA-CREF loan.
A TIAA-CREF loan looks very similar to most commercial loans from banks: there is no change in the total balance of the retirement account, only a collateral account is set up, the loan is funded by TIAA, and monthly payment pays back to TIAA. That is, TIAA is the lender, just like a bank who provides mortgage loan or auto loan. However, beyond the interest payment of the loan, there are some hidden costs.
1. Current interest rate of TIAA-CREF loan is 5.52%.
2. Hidden charge of collateral account.
Although the total balance of entire retirement account remains the same, 110% of loan amount is frozen as a collateral account. (See [1] for description of collateral account.) The collateral account (frozen account) is invested in a Supplemental TIAA Traditional Annuity which has a lower growth rate than the Retirement TIAA Traditional Annuity (a regular account). Current growth rates are:
Supplemental TIAA Traditional Annuity: 3.00%
Retirement TIAA Traditional Annuity: 3.35%
With difference in these two types of accounts, TIAA-CREF charges the difference 110%*(3.35%-3.00%)=0.385% as a hidden cost.
3. Missing gain of investment.
If a loan was not made, the frozen fund is available for investment as one’s choice. Assume that the same amount would be invested in a portfolio X with annual gain 6%. The missing gain (pre-tax) is 110% * (6% - 3.35%)=2.91%.
4. Total cost.
The total cost (after tax) of a loan is:

5.52% + 110% * (3.35% - 3.00%)*(1-15%-5.5%)


+ 110% * (6% - 3.35%)*(1-15%-5.5%) =8.144%​

where 15% and 5.5% are margin rates for federal and state income tax at age of 59 ½ (since the hidden charge and investment loss are occurred in the pre-taxed account).
Please note that the missing gain of investment is an expected number: it could be positive, or negative. For a lower risk investment, it is more reasonable to consider Retirement TIAA Traditional Annuity as the Portfolio X. In this case, the total cost is

5.52% + 110% * (3.35% - 3.00%)*(1-15%-5.5%) =5.826%​

II. TSP (Thrift Saving Plan) loans
The TSP loan looks rather complicated than TIAA loan. TIAA loans are funded by the lender (TIAA) instead of the retirement account of the borrower. Instead of a collateral account, TSP loans are funded by the retirement account of the borrower (the total balance of the retirement account is correspondingly reduced, and monthly payment will be returned to the account) [3, 4].
1. Interest rate. The interest is stated in the loan contract (current rate 2.00%).
2. Similar to a TIAA loan, the borrower is not able to invest the fund in his/her choices. Assume a low risk investment (it is reasonable for the account owner who is in an urgent of needs money). Say, G Fund (last 30 days performance is 2.35% annual). The difference 2.35%-2.00% is the equivalent of hidden charge as TIAA loans.
3. If Portfolio X (other than G Fund) was the intended investment of the account owner if no loan was made, then the missing part of investment gain is 6%-2.35% where 6% is assumed annual gain of Portfolio X.
4. Since the monthly payment directly returns back to borrower’s account, the total cost (after tax) is

2.00% + (2.35% - 2.00%) * (1-15%-5.5%) + (6% - 2.35%) * (1-15%-5.5%) = 5.18%​

plus $50 one-time application/processing charge at the front, where 15% and 5.5% are margin rates for federal and state income tax at age of 59 ½.
5. Similar to the discussion for TIAA loan, the 6% gain of Portfolio X is an expected number. With a conservative investment in G fund (as Portfolio X), the total cost is

2.00% + (2.35% - 2.00%) * (1-15%-5.5%) = 2.278%​

plus $50 one-time charge.

III. Other types of commercial loans.
Current mortgage rate is 4.15% for 15 years fixed. The actual cost (after tax) is

4.15% * (1 - 25%) = 3.113%​

where 25% is the current margin rate for federal income tax (note that some states do not have the mortgage interest as a deduction in income tax). Home equity loans are almost similar as regular mortgages (with less closing cost in some cases).
Current auto loan is 4.5% in some credit unions. The actual cost is 4.5% since there is no hidden charge or tax benefit involved.
IV. Summary.
If a borrower has choices of TIAA loan or TSP loan (as one is a higher education employee, whose spouse is a government employee), it would be a better to choice a loan from TSP. However, a bank loan with house or vehicle as collateral could be an even better choice. Certainly, one should avoid any non- collateral loan, such as, credit card loan, student loan. Most of these have two digits interest rate.
Advantage of TIAA loan. Although the total cost for a TIAA loan seems higher than all others, TIAA does have some advantages that others may not have: An early payment to an existing TIAA loan will automatically reduce the monthly payment afterwards, and raise the limit of a new loan in near future with no additional cost (some home equity loan does have similar flexibility with zero cost, while most regular home mortgages do not: it does not reduce the monthly payment immediately and does have an additional closing cost for cash-out in the future).
References
1. http://en.wikipedia.org/wiki/Collateral_(finance)
2. I. S. Schloss, D. V. Abildsoe, Understanding TIAA-CREF: how to plan for a secure and comfortable retirement. ISBN-13: 9780195131970 - ISBN-10: 0195131975 (2001)
3. https://www.tsp.gov/planparticipation/loans/loanBasics.shtml
4. https://www.tsp.gov/PDF/formspubs/oc96-16.pdf

 

[burrocrat]

nice analysis.

what do you think about a general purpose loan to pad emergency cash reserves and do a couple of things that are important to quality of life right now? get a bit a head, have some good fun. pay self back at 'G' fund rate, equivalent of a forced savings plan, but don't have to wait a year and a half to save it first then spend it?

 

[Frixxxx]

nice analysis.

what do you think about a general purpose loan to pad emergency cash reserves and do a couple of things that are important to quality of life right now? get a bit a head, have some good fun. pay self back at 'G' fund rate, equivalent of a forced savings plan, but don't have to wait a year and a half to save it first then spend it?

Save for those expenses and don't touch TSP. Budget, budget, budget.

 

[BowmanPG]

Save for those expenses and don't touch TSP. Budget, budget, budget.

Burrocrat asked: “what do you think about a general purpose loan to pad emergency cash reserves and do a couple of things that are important to quality of life right now?”
Agree with Frixxxx.
Do not touch TSP if you are able to get a collateral loan other then retirement account.
The advantages:
1. Much lower rate (save your money, why pay to the banks!!!)
2. Once you need the emergency cash, go to TSP, TIAA or 401k for a loan (TSP has limitation of two loans only, while TIAA is much nicer: you may have unlimited number of loans as long as your loan balance does NOT reach the upper bound $50k during last year).
3. Once you have saved some penny – pay it back IMMEDIATELY to 401k first (leave enough room for the next loan, and get rid of high rate)

 

[BowmanPG]

check:

http://blogs.wsj.com/economics/2009...about-401k-loans/tab/comments/#comment-318145

some interesting duscussion.

Burrocrat asked: “what do you think about a general purpose loan to pad emergency cash reserves and do a couple of things that are important to quality of life right now?”
Agree with Frixxxx.
Do not touch TSP if you are able to get a collateral loan other then retirement account.
The advantages:
1. Much lower rate (save your money, why pay to the banks!!!)
2. Once you need the emergency cash, go to TSP, TIAA or 401k for a loan (TSP has limitation of two loans only, while TIAA is much nicer: you may have unlimited number of loans as long as your loan balance does NOT reach the upper bound $50k during last year).
3. Once you have saved some penny – pay it back IMMEDIATELY to 401k first (leave enough room for the next loan, and get rid of high rate)

 

[burrocrat]

well, i paid off a tsp loan a little over a year ago, and have enjoyed watching it grow, now that i'm well into 5 figures it makes me kind of giddy just looking at it.

but i have to admit, the bigger it gets the more i cringe when i take a 1-2% down day hit. that's real dollars man!

but i'm still thinking real hard about taking a loan for the following reasons:

with volatility in the markets i'm plannning on keeping more in G fund anyway, a loan is similar, pay yourself back at same rate you would be getting anyway, although not all of it is in the whole time so gains are even less.

forced savings plan because when i get to a decent number i manage to find something i need, or more like repair or upgrade, and there goes my cash stash. so if i padded those accounts full, i would know it was really my tsp money and hopefully not be so inclined to spend it. (yes, i know that is a behavior issue not an investing one)

some of it i would spend on durable goods. i look at it as a sort of commodity play, what i purchase is tangible and holds real value (financial and personal). i can't imagine those things are going to be cheaper a year from now, not that a dollar is going to buy me more of anything for that matter. so get it now on sale while the currency buys more type thing. besides you can't eat your tsp when it all comes crashing down, but you can look at the statements and bemoan the loss, and if hungry enough i guess you could make an ok soup out of the paper and old shoe leather.

also the emotional gratification of: having an instantly available emergency fund that is also earning interest, and enjoying what i believe would be a more satisfying 'quality of life' also have real value.

 

[BowmanPG]

Yes, you are 100% right: “having an instantly available emergency fund that is also earning interest, and enjoying what i believe would be a more satisfying 'quality of life' also have real value.”
One advice: do not pay off mortgage if I still have a unpaid TSP loan. It is too expensive to use cash-out refinance as “emergency fund” and of little control of interest rate.

well, i paid off a tsp loan a little over a year ago, and have enjoyed watching it grow, now that i'm well into 5 figures it makes me kind of giddy just looking at it.

but i have to admit, the bigger it gets the more i cringe when i take a 1-2% down day hit. that's real dollars man!

but i'm still thinking real hard about taking a loan for the following reasons:

with volatility in the markets i'm plannning on keeping more in G fund anyway, a loan is similar, pay yourself back at same rate you would be getting anyway, although not all of it is in the whole time so gains are even less.

forced savings plan because when i get to a decent number i manage to find something i need, or more like repair or upgrade, and there goes my cash stash. so if i padded those accounts full, i would know it was really my tsp money and hopefully not be so inclined to spend it. (yes, i know that is a behavior issue not an investing one)

some of it i would spend on durable goods. i look at it as a sort of commodity play, what i purchase is tangible and holds real value (financial and personal). i can't imagine those things are going to be cheaper a year from now, not that a dollar is going to buy me more of anything for that matter. so get it now on sale while the currency buys more type thing. besides you can't eat your tsp when it all comes crashing down, but you can look at the statements and bemoan the loss, and if hungry enough i guess you could make an ok soup out of the paper and old shoe leather.

also the emotional gratification of: having an instantly available emergency fund that is also earning interest, and enjoying what i believe would be a more satisfying 'quality of life' also have real value.