January 31, 2023 by

First-time homebuyers quickly learn the importance of having cash flow. Between a down payment of 3.5% up to the double-digit range and other closing costs, buying a home is one of the biggest investments most people make in their lifetime. 

It’s not surprising that consumers are willing to dip into their retirement savings accounts to achieve this milestone. However, even if you could access your 401k to buy a house, does that mean you should? 

In this article, we will explore the answer to the question, ‘Can I use my 401k to buy a house” and what will happen if you do. 

Can You Use Your 401k to Buy a House?

The short answer is yes, it is possible to use your 401k to help you with a major financial event, including buying a house. However, whether you can is dependent on your employer’s policies and the retirement plan it sponsors. 

If the plan allows it, there are two ways in which you could access your 401k funds to buy a house: taking out a loan or making a withdrawal. In either case, there is a ceiling on the funds you can borrow from your employer-sponsored retirement plan. You can expect to access up to half of your vested balance or as much as $50,000, depending on which one is less

At Total Mortgage, our mortgage experts work with borrowers like you across the country. They are standing by to advise you on your options, including using your 401k to buy your dream house. Search for a banker near you today.

Borrowing from 401k

If you are a first-time homebuyer, you could potentially take out a loan from your retirement savings and direct those funds toward a down payment on a property. Remember that you are basically borrowing against yourself, and the funds will have to be repaid — plus interest — in the coming years, usually over the next half-decade

An exception is if the home you’re buying with your 401k will be used as your primary residence, in which case the five-year time limit may be extended. 

However, you are still obligated to make payments on the loan at least as frequently as every quarter, the amounts of which should be similar in size. The interest represents any gains you might have missed by removing your assets from the financial markets. 

If you adhere to the loan requirements and repay the funds within the required period, you won’t have to worry about getting hit with tax penalties. This is an attractive feature when considering using your 401k to buy a house, one that is not available if you are simply making a withdrawal from your retirement plan. 

Withdrawing 401k

The other option for buying a house with a 401k is to withdraw the funds from your retirement savings. Unlike the other way, a withdrawal is not a loan. 

Instead, the plan member takes a distribution, which incidentally is a taxable event, according to the Internal Revenue Service (IRS). The funds will not need to be repaid because once again, it is not a loan. However, if you choose this option, be prepared to pay Uncle Sam.

If you’re younger than 59 and a half, the IRS will deem the withdrawal from your 401k plan as early and attach a 10% penalty tax on those funds. This is in addition to a separate 10% tax that is applied for making a withdrawal in the first place and triggering a taxable event. 

One way around two layers of tax is if you happen to qualify for financial hardship. However, it is not easy to qualify for financial hardship by the standards of the U.S. government. If you meet the bar, the funds you withdraw from your retirement plan cannot be used for a mortgage payment. 

Instead, they must be directed toward a first-time homebuyer’s down payment on a property. You can expect to be taxed 10% for this early withdrawal but can avoid the separate 10% penalty tax on a withdrawal of up to $10,000.  

Disadvantages of Using 401k to Purchase a Home 

While there are advantages to using your 401k to buy a house, not least of which includes homeownership, you might want to exhaust all your other options first. 

That’s because there are downsides to using your 401k for a real estate deal too, which you should be aware of so there are no surprises down the road. 

  • By taking money out of your 401k plan to buy a house, you could potentially miss out on profits in the financial markets. As a result, when it comes time to retire, your savings will be smaller than they would otherwise be in your golden years. 
  • If you take a distribution, your tax bill will be anywhere from 10-20% higher than it would otherwise be if you did not make an early withdrawal.  
  • If you take a loan, the funds must be repaid (plus interest) which could cripple your cash flow for years as you make regular payments. These funds might be automatically deducted from your pay considering your employer is the sponsor of a 401k plan. As a result, you will have a smaller paycheck than you otherwise would.

Alternatives to Using 401k to Buy a House

Before you use your 401k to buy a house, you might want to consider other alternatives if they are viable to you. 

  • There are down payment assistance programs that you might be able to access at the state or federal level. To qualify, your income should be considered low to moderate. The assistance could be in the form of a grant or loan with low interest or a deferred-payment structure. 
  • You could also attempt to work with the seller of the property you want to buy. In this scenario, you must ask the seller for money, which they will direct toward closing costs. They will raise the home’s purchase price to offset this amount, which you will then be responsible for repaying through your mortgage payments. 
  • You could also ask a loved one for a gift, which you could direct toward a down payment. In this case, you must obtain a letter stating that the funds were intended as a gift, not a loan.


Now that you know how to use your 401k to buy a house, perhaps you are ready to take that next step toward homeownership. If so, our mortgage experts at Total Mortgage are standing by to help you along this exciting journey. 

Contact us and get your free rate quote today. 

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