Can You Use Your 401K to Make A Down Payment On A Home?
Getting together the money to make a down payment on a home can be difficult for many home buyers. In fact, for some the down payment makes buying a home prohibitively expensive. Fortunately, there are options. Having a 401K of significant value can be very helpful, under the right circumstances. Home buyers who are having a hard time getting together their down payment should be aware of the various ways that they can use their 401K to buy a home.
Can You Take Money Out of Your 401K to Make A Down Payment?
Yes, in most cases, a home buyer can take money out of their 401K to make a down payment on a home. This type of withdrawal qualifies as a hardship exemption. Any money that is taken out from a 401K for a hardship exemption is penalized with a 10% fee, plus income tax.
Are There Any Ways to Avoid Financial Penalties?
There are a multitude of ways to avoid financial penalties when using the money from a 401K to fund a down payment. Knowing the various options can help home buyers decide which option is right for them.
Rolling the 401K into an IRA
One way that home buyers might avoid paying a 10% penalty on a 401K is to roll it over into an IRA. Rolling a 401K into an IRA isn't possible if the 401K is with a current employer. However, those home buyers who are able to roll over the 401K to an IRA must be aware that the process is time consuming. Get started early just to ensure the money will be available when the time comes.
Borrowing Money From the 401K
Instead of withdrawing the money from a 401K, many home buyers will borrow the money instead. Home buyers can borrow half the value of their 401K or up to $50,000, whichever one is lowest.
This option does not require the home buyer to pay penalties or tax, only interest. That interest is not paid to the company that houses the 401K, but to the 401K itself. Usually interest rates for 401Ks are about 2 points above prime. The money is repaid to the 401K within 5 years of borrowing the money. The larger the loan amount, the higher the monthly payment becomes.
Aside from Financial Penalties, Are There Any Other Down Sides to Borrowing from Your 401K?
Yes, there are other down sides to borrowing from a 401K. For example, the loan that's taken out to make the down payment can impact a buyer's debt to income ratio. This in turn could affect the buyer's ability to secure a mortgage. It's important to take this into account and to avoid borrowing too much, either from the 401K or from the mortgage lender.
If there's no way to avoid taking out a hefty loan from a 401K in order to buy a Rolling Hills home, some borrowers may find it's better to make a withdrawal and pay the penalties rather than borrow the money and face a potential problem securing a mortgage. Many mortgage lenders can help home buyers decide whether or borrowing from their 401K is a good plan.
For More Information, Talk to a Mortgage Lender
If you're a home buyer who is having a hard time getting together the money for a down payment, borrowing the money from your 401K or taking out the money with a penalty may be a good option for you. For more information about how you can borrow or remove money from your 401K, contact a reputable lender in your area.