Can I use my 401(k) to buy a house?

Borrowing from your retirement fund comes with risks

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A home is one of the biggest purchases of your life. And with sky-high housing prices, it’s getting harder and harder to save enough to buy a home of your own. To put enough cash together for a down payment, you might be wondering if you can use money from your 401(k).

Yes, you can borrow from your 401(k) account to buy a home. But there are quite a few things to consider before tapping into your retirement account.


Key insights

  • You can use a 401(k) loan for a home down payment.
  • 401(k) loans don’t usually hurt your debt-to-income ratio as they are not considered debt.
  • If you lose your job, the balance of your 401(k) loan may be due immediately.
  • If you can’t repay your 401(k) loan, there may be IRS penalties and taxes assessed.

401(k) borrowing rules

You can borrow money against your 401(k) account by taking out a 401(k) loan. These loans are a type of portfolio loan that let you borrow a portion of the balance of your 401(k) account.

There are specific borrowing rules you must adhere to for a 401(k) loan, including:

  • You can borrow up to $50,000 or 50% of your vested balance — whichever is less.
  • If 50% of your vested balance is less than $10,000, the maximum limit is $10,000.
  • Repayment terms are set by your 401(k) provider, but the maximum repayment term is five years, with a minimum of quarterly payments required.
  • The only exception to the repayment term maximum is purchasing a principal residence — allowing 401(k) plan providers to extend the repayment term beyond five years.
  • You can take out multiple loans, but the total balance may not exceed the plan maximum.
  • You must pay your 401(k) loan in full immediately when you leave your job (or are terminated). Or roll the remaining loan balance over to a qualified IRA plan by the tax filing deadline for the year you leave.

The 401(k) loan repayment terms and rates are set by your provider, so it’s important to read through the loan terms and conditions before applying.

Note: Not all 401(k) providers allow plan participants to take out a loan.

Risks of borrowing from your 401(k)

Borrowing from your 401(k) comes with a host of risks, including potential IRS penalties and taxes. Here are a few risks to be aware of before taking out a 401(k) loan to purchase a home.

Leaving your job

According to the IRS, if you leave your job (or are terminated), you are responsible for repaying the 401(k) loan in full immediately or rolling the loan’s outstanding balance into an IRA. This can be a massive burden if you don’t have the funds to repay the loan.

If you can’t repay, the unpaid loan will be counted as a “deemed distribution,” and if you are under age 59½, the funds used are subject to a 10% IRS penalty and income tax.

You may be able to roll over from your 401(k) account to an IRA or other eligible retirement plan to avoid the income tax implications and IRS penalty, as long as it is done by the tax filing deadline (including extensions) the following year.

» MORE: Are personal loans taxable and considered income?

401(k) loan default

If you default on your 401(k) loan repayment, you may be on the hook for IRS penalties and taxes. If you miss a payment, your loan is in default. Eventually, the defaulted amount will be counted as a deemed distribution, and if you’re under age 59½, you are subject to a 10% IRS penalty plus income taxes.

Your plan administrator sets the terms and conditions on how loan defaults are handled. Some specify that payments not made by the end of the following quarter are to be counted as a deemed distribution. Or there may be other terms specified. It’s important to check with your plan administrator to understand how the administrator treats missed payments and loan defaults.

Impact on retirement

In addition to the potential for IRS penalties and taxes, your 401(k) plan administrator may deem unpaid balances on your loan a “distribution” if you miss payments or leave your job. This can have a massive impact on your retirement savings as you can’t make up for those lost contributions.

In addition, some workplace retirement plans don’t allow contributions until the 401(k) loan is paid off, further delaying your retirement savings. This also impacts your taxes, as traditional 401(k) contributions lower your taxable income.

It’s important to understand the long-term implications of a 401(k) loan before applying for one.

How to borrow from your 401(k)

If you choose to borrow from your 401(k) to purchase a home, here are the steps to take:

  1. Contact your 401(k) plan administrator. All 401(k) loans will be handled through your plan administrator. You’ll need to contact the plan administrator to understand what your options are — and if it even offers 401(k) loans at all.
  2. Review the loan costs and terms. Review the terms and conditions, including the loan fees, interest rate and term length, before applying. If you are borrowing to purchase a home, make sure to specify this to be able to extend your loan repayment term (if desired).
  3. Complete the loan application. You will need to complete a loan application, which may include providing additional information or documentation. These loans aren’t considered consumer debt (it’s an asset loan), so the process should be fairly quick.
  4. Receive your funds. Once the application is received and approved, your 401(k) plan administrator should be able to directly deposit your funds to your bank account or write you a check for the amount borrowed.
  5. Set up a payment plan. Make sure to begin regular payments as specified by your loan agreement. Consider setting up autopay if it’s available to avoid missing any loan payments.

Alternatives to borrowing from your 401(k)

While borrowing from your 401(k) might seem like the quick and easy route to accessing funds for a home down payment, you should consider other options as well.

“A few alternatives exist to borrow from your 401(k) to buy a house,” said ​Jorey Bernstein, founder of Bernstein Investment Consultants in California. “One option is to get a traditional mortgage. Another option is getting a government-backed loan, such as an FHA or VA loan. These loans have lower down payment requirements than traditional mortgages, making them a good option for first-time homebuyers.”

Here are a few other options to consider:

Down payment assistance

There are many down payment assistance programs available from federal and state agencies. These programs vary in terms and requirements, with some offering forgivable loans, while others offer direct grants for those who qualify. Check with your state on the program available that you may qualify for.

Home equity line of credit

If you currently own a home but are looking to purchase your next home, you may be able to use your current home equity to come up with the down payment funds. Just note that it will impact your debt-to-income ratio for qualifying for a mortgage.

Piggyback loan

Some lenders offer a piggyback loan that lets you borrow funds for a home down payment. These can help you borrow up to 20% of the loan to avoid mortgage insurance.

Sell stuff

If you need quick access to cash for a down payment, you may be able to sell some things around the house — or other assets you own. Whether it’s a car you don’t use, furniture or appliances you don’t want or some cryptocurrency you’re holding on to, you can sell things to raise some extra cash.

Family or friend gift

If you have a friend or family member willing to gift you funds for a down payment, this can help you purchase a home. But most lenders will require a written letter stating the funds are a gift with no obligation to pay them back.

» MORE: Can I use a personal loan for my down payment?

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    FAQ

    Can I use my 401(k) to pay off my mortgage?

    You can take out a 401(k) loan to pay off your mortgage, but in most cases, the interest rate and repayment terms will be unfavorable. And withdrawing funds early from your 401(k) account to pay off your mortgage may result in a 10% IRS penalty and income taxes. In most scenarios, this is a bad idea.

    Is a 401(k) the same as an IRA?

    No, a 401(k) is a workplace retirement plan tied to your job, while an IRA is an individual retirement account that is a stand-alone account that you manage yourself. While 401(k) accounts choose a plan administrator for you and give you limited investment options, you can open an IRA at a broker of your choosing and have access to thousands of investment choices.

    What is the penalty for withdrawing from your 401(k)?

    If you withdraw funds from your 401(k) account early (before age 59½), the IRS can assess a 10% early withdrawal penalty, as well as taxes at your ordinary income tax rate. This penalty can be assessed if you default on your 401(k) loan as well, depending on the circumstances and plan rules. There are exceptions to these taxes and penalties.

    What is a hardship withdrawal?

    A hardship withdrawal from your 401(k) is allowable by the IRS under certain circumstances. The allowable circumstances are specified by the 401(k) plan administrator but must include “immediate and heavy financial need,” according to the IRS. You may still owe income taxes and potential early withdrawal penalties, depending on the type of account and withdrawals made.

    Bottom line

    “If you can afford the payments and are confident that you can repay the loan (within the term specified), then it may be a good option for you,” Bernstein said. “However, if you are unsure if you can afford the payments or think you may lose your job soon, then it is best to avoid using a 401(k) loan.”

    There are several alternatives that may be a better option than a 401(k) loan or withdrawal, depending on your circumstances. It’s a good idea to explore all possibilities and run the numbers before choosing a path forward. And meeting with a tax professional or financial advisor can help you navigate this decision with confidence.


    Article sources
    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
    1. IRS, “Retirement Plans FAQs regarding Loans.” Accessed Feb. 15, 2024.
    2. IRS, “Retirement Topics - Plan Loans.” Accessed Feb. 15, 2024.
    3. IRS, “Retirement topics: Exceptions to tax on early distributions.” Accessed Feb. 15, 2024.
    4. IRS, “Retirement Topics - Hardship Distributions.” Accessed Feb. 15, 2024.
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