Yes, you can use your 401k to buy a house. But should you? This is your guide to understanding how it works and deciding if it’s a smart move for you.
Yes, you can use your 401k to buy a house so long as the holder of your account allows you to withdraw or take a loan from said account. However, if it were the ideal option, everyone would be doing it.
There are some major risks tied to the benefits of being able to tap into your 401k accounts now. That said, we want to help you understand exactly what’s in store if you decide to take this route in your home buying process.
Is it a good idea to use 401k to buy a house?
Yes, in some instances using your 401k is a perfectly viable option to purchase a home. However, if you have any other form of savings set aside, you really should consider using those funds before you go with this option.
The simple fact is that you’re borrowing or taking money from your future self when you tap into a retirement account. That means that you’re shorting yourself tomorrow to make ends meet today. Even if you only borrow money from the account, it will only accrue interest based on its current value. This is known as an opportunity cost.
For example, if you take $20,000 of an account with $100,000 in it, you’ll only collect interest on the $80,000. Paying back with interest, as required with a 401k loan, still doesn’t offset this loss.
Furthermore, you can make a withdrawal from the account without paying it back. That does somewhat offset the financial burden of making an additional payment, though you will be required to file that amount taken out with your income taxes and pay a 10% penalty on it. Making a withdraw from your 401K might also bump you into a higher tax bracket, increasing the amount due at the end of the year.
These are the reasons why it’s better to take another financial option if you have it available to you. However, we assume that you’re considering taking a portion of your 401K because your options are limited.
One primary benefit of borrowing money from your 401k is that there is no credit check required. It’s already your money, even if you’re only allowed to take a certain percentage based on your term agreements.
Repaying the amount due can also be spread out over a long period—up to 20 years in some cases. Even with interest, that can really minimize payment values, and you might even be able to incorporate automatic payments to be taken through payroll.
How to use your 401k to buy a house.
Now that we know that you can use your 401K and it can be a good option, let’s talk a little about how you use it to buy a home.
Talk to your employer about loans and withdrawals from your 401k plan.
The holder of your 401k, typically your employer, will have terms and conditions specific to your 401k on loans and withdrawals. You need to get this information, read through the terms and conditions, then decide if this is a viable option.
Talk to your mortgage loan officer about their requirements.
The mortgage loan officer may need to see terms of withdrawing before they accept payments tied to a 401k account. If this is the case, make sure you discuss this proposal with them and show them the terms of withdrawing before you dip into your 401k.
Gather and file the appropriate paperwork.
After determining if you want to use your 401k and how much, you need to file the appropriate paperwork to receive your money.
Receive cash and distribute it accordingly.
Once you have the check, you can use it to purchase a home. Just be prepared to provide the loan officer with a copy of the check as they may require you to.
Make payments/pay penalties and taxes.
Make sure your 401k payments are on time. If not, you might be required to file it with your income taxes, potentially bumping you into a higher tax bracket, and you will need to pay the withdrawal penalty.
Can you use 401k to buy a house without penalty?
You will not be penalized if you take a loan for your 401k rather than a withdrawal because you’re paying the money back. However, you will need to pay interest to the account. You can think of it as paying interest to yourself, though.
Another way around penalization is if you’re above 59.5 years of age. After this point, no withdrawal penalties are applied. In some circumstances, you might not pay the penalty at the age of 55 or older either.
Can you withdraw from 401k for a first-time home purchase?
Yes, you can withdraw from a 401K for a first time home purchase. First-time homebuyers have the option to withdraw up to $10,000 from their 401k with no penalties. However, that money will still be subject to income taxes that you are required to pay come tax season.
How much of 401k can be used for home purchases?
How much you can take from your 401k depends on the terms and conditions your holder has in place. In some cases, you might have the option to withdraw the entire account, and in others, there might be a cap in place to prevent you from doing so. Either way, it’s not recommended that you take the entire account. Instead, you should only take a portion to cover your down payment, as it’s better for you, in the long run, to leave as much of your account intact as possible.
Do mortgage lenders look at 401k?
Some lenders may allow you to use your 401k as proof of assets because it is a personal investment. However, they won’t do so otherwise, and it generally won’t impact your approval odds if they do. They only consider about 70% of the account because the values can suddenly drop at any point.