If you’re struggling to save enough for dap humiliation, you may wonder if tapping your 401(k) is the right option. That is possible, but doing so is at serious risk, including penalties for early withdrawals and loss of investment growth.
This Redfin article answers questions about using a 401(k) to buy a home through loans, withdrawals, and process drawbacks. That way you will know which options are available when using the 401(k) whether you are buying a home in Tampa, Florida or Newark, NJ.
Key takeout
You can use your 401(k) to buy a home with a 401(k) loan or withdrawal. With a 401(k) loan, you can borrow money without penalty, but you will have to pay it back. Withdrawal of 401(k) will be subject to a 10% fine and income tax.
Can I buy a house using my 401(k)?
The short answer is yes, you can buy a house using your 401(k). There are two options to consider – 401(k) loan and 401(k) withdrawal.
401(k) Loan to buy a house
The first option is a 401(k) loan for purchases from home. With a 401(k) loan, you can borrow it yourself, so you don’t have to pay any fines or taxes on the funds. However, you will need to pay off the loan with interest.
Most 401(k) loan interest rates and repayment plans are pre-determined by your employer or 401(k) provider. It is common to repay the amount within five years, but some plans allow you to repay it for more than 15 years if the funds are used to purchase the home.
Usually you can borrow up to half the money (“vsked balance”) for your entire 401(k) but under $50,000.
Depending on your 401(k) plan, you may not be able to make additional contributions until you pay off your loan. Repayment of the loan is not considered a new contribution either.
401(k) withdrawal to buy a house
Withdrawal from the 401(k) can be risky, but there’s a reason why it works for you. Some 401(k) providers don’t allow loans, so this may be the only option available. Plus, if you need more than $50,000, you can get more money by withdrawing it.
There are other drawbacks to keep in mind:
If you are under the age of 59, you will be subject to a 10% penalty for withdrawing from 401(k) unless you meet certain exemption requirements. Additionally, even if you meet the exemption requirements, you will still be required to pay income tax on money withdrawn from your account. If you have a Roth 401(k), your contribution will be made after tax, so you can usually withdraw your contribution without any additional taxes. However, withdrawing profits before the age of 59½ (and before the account has not been opened for at least five years) can cause taxes and penalties.
When can I withdraw from 401 (k) without penalty?
A difficult withdrawal allows you to withdraw from the 401(k) without penalty, but is limited to “immediate and heavy financial needs.” Here are some examples of what situations can qualify.
Certain medical or medical debt costs to prevent eviction or foreclosure income for a particular family after withdrawal age is the funeral costs of a specific family, and funeral costs for 12 months, such as tuition fees.
Please look into your options as there are additional circumstances that may qualify as a difficult withdrawal. For example, you are eligible for a hard-working withdrawal to cover down payments and closing costs. However, these rules may be strict and you may need to pay a 10% penalty for funds you withdraw.
How to rent from a 401(k) account to buy a house
To fund a down payment from a 401(k) loan, you will need to speak to your employer’s benefits office or HR department, or your 401(k) plan provider. You can also refer to the planning document to see if you can rent a home from a 401(k) and buy it.
I would like to know how much you can borrow, the interest you have to pay, and the repayment period. Additionally, they ask about repayment options, such as whether the employer will deduct monthly payments from their payroll or whether it will allow 401(k) contributions while repaying the loan.
If you choose to quit or lose your job during the repayment period, your repayment schedule will change. In most cases, you will need to pay back the total amount before the next tax deadline. Otherwise you will face a 10% penalty.
Pros and cons of buying a house with a 401(k)
There are a few factors to consider before purchasing a home using a 401(k).
The advantages of using 401(k) funds
Easier Eligibility Process: With most loan approvals, they will look into your finances and perform a credit check. Normally, when you apply for a 401(k) loan, you don’t need that information as the money is already yours.
Receive funds faster: The approval process is much faster, so you can usually get funds within a few days.
You will receive interest payments: Unlike mortgages, your interest payments will not be sent to the lender. Interest payments will return to 401(k) as part of the repayment process.
401(k) loans do not count towards debt-to-income ratio: Your debt-to-income ratio (DTI) is usually used when applying for a new credit or loan line. 401(k) loans do not affect DTI. This means you can apply for a new credit card or get a car loan if necessary.
Cons of using a 401(k) fund
Decrease in retirement savings: Withdrawal or robbed your loan will result in some of your retirement savings being lost. You will ultimately pay it back, but this temporary savings can lead to long-term losses.
Taxes and Additional Penalties: If you choose to withdraw your 401(k) funds, you will need to pay income tax on the funds. You will also need to pay a 10% penalty to withdraw these funds early.
Investment growth and lost contributions: With approximately 401(k) accounts, you cannot contribute to your account while paying off your loan. You may lose the profits that build your funds as well.
Additional monthly payments: While you are paying off your loan, you should consider it in your monthly payments. In some cases, repayments can be made in post-tax dollars and taken directly from your salary.
Is it a good idea to buy a house using a 401(k)?
Buying a home using a 401(k) may work in certain circumstances, but it does come with risk. It may make sense if:
There are no other savings eligible for a 401(k) loan with reasonable repayment terms that you plan to stay at home for the long term
Instead of using a 401(k) to buy a home
There are several options for buying a home using the 401(k). Let’s take a look at them:
Individual Retirement Account (IRA)
Individual Retirement Accounts (IRAs) have options available to first-time home buyers and those who have not owned a major residence for two years. This will allow people under the age of 59 to withdraw up to $10,000 with a no-penalty, traditional or Ross IRA. If you have any questions, consider talking to a financial advisor.
Low and No Down Mortgages
There are plenty of low, unlimited mortgages available to qualified home buyers like FHA, USDA and VA loans. For example, FHA loans supported by federal housing authorities offer loans with a low 3.5% payment. These loans have more stringent requirements, so they may not be the right option for everyone.
Down payment support program
Whether you’re a first-time home buyer or a repeat buyer, many down payment assistance programs are available. Most are aimed at first-time buyers, but there are many options to reduce the amount you pay with down payment or closing costs.
FAQ for buying a home using 401(k)
What is 401(k)?
A 401(k) is a type of retirement savings account that allows you to select a specific portion of your income and enter an account. There are two types of 401(k) accounts: traditional 401(k) and Roth 401(k). Traditional 401(k) contributions are pre-tax, so taking them out will result in taxation. On the other hand, Roth 401(k) is subject to taxes before contributions, so you don’t have to pay taxes later.
Does my employer know if I’m going to withdraw from the 401(k)?
Your employer is probably HR and you will know if you want to withdraw from your 401(k), but not your direct manager.
How will withdrawal from 401(k) affect mortgage approval?
Using a 401(k) loan or withdrawal can affect your mortgage application in a variety of ways. A 401(k) loan does not count against the debt-to-income (DTI) ratio, but withdrawals can reduce available assets and affect lenders’ financial stability. Make sure to check with your lender before purchasing a home using a 401(k) fund.
Can I use my 401(k) loan and withdrawal at the same time to buy a home?
In most cases, you cannot combine a 401(k) loan with a withdrawal at the same time. Most plans only allow one type of 401(k) distribution at a time, but this depends on the employer’s planning rules.
401(k) Are there any exemptions for first-time home buyers?
There is no exemption for first-time home buyers who want to use their 401(k) to fund their home purchases.
Can I buy a second home using the 401(k)?
Yes, you can purchase the second property using the 401(k). You will face the same penalties and repayments, whether you have a loan or withdrawal of funds.
Can I use a 401(k) to cover the closure costs?
Yes, you can use a 401(k) loan or withdrawal to cover closing costs such as lender costs, valuation costs, and escrow costs. Withdrawal comes with penalties and taxes, but you will need to pay off the loan.
Can I buy a house using Post 401(k)? Yes, this is how it first appeared on Redfin | Real Estate Tips for Home Buying, Sales and more.
