Can You Use Your 401(k) To Buy A House?

If you’re having trouble saving enough money to afford a down payment and closing costs on a home, you might wonder, “Can I use my 401(k) to buy a house?” It is possible to use money from your 401(k) to help cover the upfront costs of buying a home. However, it’s important to understand how it works and the potential downsides.

Key Takeaways:

How Does A 401(k) Work?

One of the most common benefits companies offer employees is a 401(k) retirement savings plan.

A traditional 401(k) sets aside a portion of your pre-tax income and invests it in stocks, mutual funds and/or bonds. In many cases, employers will match your contributions to your 401(k) account up to a certain amount , which many people see as, essentially, free money.

While you pay no taxes on your 401(k) contributions, you will pay taxes when you withdraw the funds. The idea is once you’re retired, you’ll likely be withdrawing funds when you’re in a lower tax bracket than you’re in now. If you withdraw money from your 401(k) early — before you’re 59 ½ years old —  you’ll have to pay a 10% penalty and taxes on the amount you take out.

Some people prefer to save for retirement using a Roth 401(k), where you pay taxes on your contributions and don’t have to pay taxes when you withdraw.

What’s Your Goal?

Home Purchase

Home Refinance

Tap Into Equity

How To Access Funds From Your 401(k)

You can access the money in your 401(k) before you’re 59 ½ years old by taking out a 401(k) loan or making an early withdrawal.

Take Out A 401(k) Loan

You usually can borrow against your 401(k) to buy a house by taking out a 401(k) loan. The money is yours – so you can use it for almost anything you want or need, including buying a home. You’ll pay no tax or penalty if you borrow from your 401(k) and pay it back according to the terms. Note that you typically cannot borrow from an individual retirement account plan.

If you borrow money from your 401(k), you’ll be required to repay the loan, typically within five years. Legally, the term can be longer if the money is used to purchase a primary home. In addition to the principal loan amount, you’ll need to pay interest. On the upside, you’ll be repaying the interest to your account, making repayment less onerous. However, 401(k) loans are repaid with after-tax dollars, so you’ll be missing out on the tax benefits that make traditional 401(k) accounts attractive in the first place.

It’s also crucial to understand that if you have a 401(k) loan and leave your job, the loan amount must be repaid in full. If you can’t repay the amount in time, you may be able to avoid the tax consequences of a distribution if you roll over all or part of the outstanding balance of the loan to a new 401(k) or IRA plan.  

If you don’t repay the loan by tax time, the money will be considered an early withdrawal. This means it will be taxed at ordinary income tax rates – and you’ll have to pay the 10% early withdrawal fee.

Make A Withdrawal From Your 401(k)

Another way to access money in your 401(k) is by making a withdrawal. This is typically thought of as a less desirable option because the money will be taxed, and you’ll be charged a 10% early withdrawal penalty if you’re under 59 ½ years old.

You may be able to avoid the penalty if you qualify for a hardship withdrawal and need the money due to an immediate financial need, like medical expenses. There are some cases where the purchase of a primary residence can qualify for this kind of withdrawal, but it’s tricky, and you’ll need to present evidence of financial hardship. Either way, you’ll still be taxed on the early withdrawal.

Why Buy A House With Your 401(k)?

Despite the potential downsides, some home buyers use their 401(k) to help them buy a home. Here are some of the reasons why:

How To Use Your 401(k) To Buy A House

If you think using your 401(k) to help you buy a home might be the right move for you, here are the next steps to take:

Pros and Cons Of Using A 401(k) To Buy A House

Every big financial decision you make means weighing the advantages and disadvantages. Choosing to borrow from your retirement account to invest in a home today is no exception. Let’s take a look at some of the pros and cons.

401(k) Loans Pros And Cons

There are pros and cons to consider when taking out a 401(k) loan.

Pros

Some of the pros of a 401(k) loan include:

Cons

Here are some of the downsides of taking out a 401(k) loan:

401(k) Withdrawals Pros And Cons

Let’s look at some pros and cons of using a 401(k) withdrawal to buy a home.

Pros

Some of the advantages of using a 401(k) withdrawal for home purchase include:                                  

Cons

Making an early 401(k) withdrawal comes with some considerable downsides, though, including:

Alternatives To Buying A House With Your 401(k)

The good news is that borrowing from your 401(k) is just one way to pay for a home. Let’s take a look at some of the alternative options and home loans:

First-Time Home Buyer Programs

A wide variety of nationwide and local programs are available to help first-time home buyers. These can help you gather the money for a down payment and closing costs. Many programs offer grants that do not need to be repaid.

Government agencies and nonprofit organizations offer designated down payment assistance programs typically geared toward low- and moderate-income families who are first-time home buyers. You can search for programs in your area by using this tool.

The U.S. Department of Housing and Urban Development also maintains a list of local home buying assistance programs by state. Your lender may be able to suggest additional resources for buying a home in your area.

IRA Accounts

Individual retirement accounts are another type of long-term savings account. Unlike a 401(k), IRAs allow first-time home buyers to withdraw up to $10,000 without the 10% penalty if the money is used to purchase a home. If it’s a traditional IRA, you’ll still need to pay taxes on that withdrawal. If it’s a Roth IRA, you’ll have already paid those taxes when you contributed the money to the account.

Getting A Mortgage Without Assistance

There are also a lot of misconceptions about how much money you need to buy a home. Many people think it’s necessary to have a 20% down payment, but that is not always   true. You can get a conforming mortgage with a conventional lender with as little as 3% down.

Government Home Loans

Government-backed mortgages are also low down-payment options. If you’re having trouble coming up with enough money to take out a conventional home loan and don’t want to dip into your retirement savings, then you might consider a government-backed loan. These loans are insured by government agencies to reduce the lender’s risk. As a result, lenders can offer looser eligibility restrictions. For qualifying home buyers, these loans can be a good option for buying a primary residence, especially for those with a history of financial hardship. Here are three types to consider:

FHA Loans

FHA loans are issued by private lenders and insured by the Federal Housing Administration. FHA loans are available with down payments as low as 3.5% and allow for lower credit scores than conventional loans. If your credit isn’t so hot and you don’t have much saved for a down payment, an FHA loan might be your cheapest option. Remember, though, that all FHA loans come with mandatory mortgage insurance.

USDA Loans

The U.S. Department of Agriculture offers USDA loans to low- and moderate-income borrowers in certain rural areas. One of the biggest perks is that these loans do not require a down payment. However, you will need to pay an upfront and annual guarantee fees.

VA Loans

Veterans Affairs offers VA loans to eligible military servicemembers, veterans and their surviving spouses. These loans are available with no down payment or mortgage insurance but may require an upfront funding fee.

FAQ

Here are the answers to some frequently asked questions about using your 401(k) to buy a home:

The Bottom Line

As you can see, home buyers have many options for getting the funding they need to buy a house. Borrowing or withdrawing from your 401(k) plan can provide necessary funds but be financially risky. Keep all your options in mind when deciding the best way to finance your home to help you plan for a healthy financial future.

More From Quicken Loans:

Victoria Araj contributed to the reporting of this article.