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Even when you’re paying yourself back, your employer won’t consider those funds a new contribution and therefore won’t match them. If you’re seriously considering borrowing from your 401(k) to purchase a home, your employer’s HR department is your first stop. Your employer can help you determine if your 401(k) plan allows loans or put you in touch with your plan provider. Some cities and local municipalities offer down payment assistance programs to enable first-time buyers to purchase homes within their communities.
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You'll owe all the penalty and income taxes you would owe on any early 401(k) withdrawal if the remaining loan balance is reclassified as a "deemed contribution." Different mortgages have different down payment and credit requirements. For instance, you can qualify for an FHA mortgage with a credit score of 580 and a down payment of 3.5%. With conventional mortgages, you can get one with as little as 3% down and a credit score of 620. Though, keep in mind that, with a lower down payment, you’ll have a higher interest rate and will need to pay mortgage insurance. If you borrow money from your 401(k), you’ll be required to repay the loan, typically within 5 years.
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Basically, you’re taking out a loan against yourself when you withdraw from your 401(k), so you’ll have to pay the money back with interest. You also won’t be allowed to contribute additional funds to your 401(k) until you’ve paid back the money you borrowed. Not only do you avoid the 10% early withdrawal penalty, but the amount you withdraw will not be subject to income tax.
Buy a House With a 401(k) Retirement Plan
You will incur interest that will be paid to your account, and you may not be able to make contributions until the loan is repaid. Under such agreements, two parties exchange cash flows with each other. The lending bank will swap the variable payments it may make to service a mortgage (which is fixed to the SONIA rate) for payments at a fixed rate. This insulates the lending bank from unexpected increases in the SONIA rate. You can use features like auto-escalation to increase your retirement savings rate by a few percentage points each year until you reach your goal.
But doing that by withdrawing from your 401(k) could put you in even more of a financial bind since it will deplete your retirement funds. If you’re thinking about tapping your retirement savings, explore other options first, and make absolutely sure that you’ll be able to get your retirement accounts back on track. You are only allowed to withdraw the amount needed to cover the need.
You can also tap into your 401(k) before you turn 55 if you left or lost a job. If you take out $10,000 from a $20, (k) account, you’ll only have $10,000 that will continue accruing interest. With a 7% annualized rate of return, that $10,000 could become $54,000 over 25 years – compared to $108,000 had you not withdrawn the $10,000.
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If your withdrawal exceeds $10,000, then the 10% penalty is applied to the additional distribution. LMB Mortgage Services, Inc., (dba Quicken Loans), is not acting as a lender or broker. The information provided by you to Quicken Loans is not an application for a mortgage loan, nor is it used to pre-qualify you with any lender.
Potential for Reduced Retirement Savings
United States Department of Agriculture (USDA) loans and VA loans offer 0% down payments. Meanwhile, conventional loans may require up to 20% down, although they may offer down payment options as low as 3% to first-time homebuyers. Individual retirement accounts (IRAs) have special provisions for first-time homebuyers and people who haven’t owned a primary residence in the last two years.
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You may be able to withdraw funds from a 401(k) plan that you've left behind at a previous employer and haven't rolled over to a new 401(k). You'll owe both a 10% early withdrawal penalty on the amount withdrawn and ordinary income tax if you're younger than age 59½ and you decide to cash out an old 401(k). Your plan custodian will withhold 20% of the amount withdrawn for taxes. If you don’t have enough for a down payment and closing costs, your best option may be to wait. You can continue saving and looking for other opportunities to grow your income. Consider picking up a side hustle or turning a hobby into a business.
If you want to use retirement savings to buy a house, there are a few better alternatives, including one hiding in plain sight. If you’re over 59 ½ and retired, you do not have to worry about penalties. You can read more on senior mortgages and homebuying after age 60 here.
If they don’t—or if you need more than a $50,000 loan—then you might consider an outright withdrawal from the account. With this strategy, you will incur a 10% penalty on the amount you withdraw from a traditional 401(k) unless you meet the requirements for an exemption. If you take money out early, you incur a 10% early withdrawal penalty. The earliest you can withdraw from a 401(k) without facing penalties and taxation is age 59½—or 55, if you’ve left or lost your job.
