Using your 401k to buy a house | What you need to know

When buying a home, it can be difficult to find a large down payment. But if you’ve saved money in a 401k, you might be wondering if it’s a good idea to use that.

Using your 401k to buy a house |  What you need to know

Taking money out of your 401K will affect your financial situation when you retire. For this reason, advisors often warn against touching this potential source of a deposit unless you really have no other options.

Before you choose to loot your retirement plan to buy a home, there are many things to consider, including alternatives.

Can you use your 401k for a deposit?

You should be able to use money from your 401k to cover the cost of your down payment when buying a home. You can also use these funds to pay the closing costs, but it may not be the best decision in the long run.

There are limits to the amount you can withdraw from your pension scheme. So while you can use it to contribute to your down payment, you can’t buy a house with the money.

There are two ways to use your 401k to buy your home. You can withdraw money from the plan or take out a loan from it. Let’s take a look at the pros and cons of each option.


When buying a home it can be hard to find a large down payment, but if you’ve saved money in a 401k you may be wondering if you should use it, and here are some pros and cons to consider. #real estate #home purchases

The Pros and Cons of Using Your 401k to Buy Your Home

There are pros and cons to 401k loans and withdrawals that you should understand before opting for this option.

401k loans

401k loan explainedPros

The major advantage of taking out a loan compared to withdrawing money is the cost. When you take out a loan, there is no penalty like with a withdrawal.

This type of loan also does not add debt to your income-to-debt ratio. This means that the loan will not negatively affect the qualification for your mortgage.

Another advantage of the loan is that it is not reported to credit bureaus. Normally this is not the case with loans, and applying for credit after getting pre-approval from your lender may mean that you are not getting the mortgage you expect.

cons

When you have a 401k loan, you can no longer contribute to your retirement plan. This also means that your employer does not pay a premium either.

Your employer must also allow loans as part of their retirement plan. Since this is a loan, you have to pay interest that can be 1% or 2% above the principal rate. In general, these types of loans must be repaid within 5 years, and according to the schedule required by your provider.

This may mean that your 401k will not be credited for 5 years. Your pension fund will also miss out on 5 years of compound interest. Both things will mean that your retirement savings will be a lot less than they would otherwise be.

If you quit your job or are fired before you have repaid the loan, you must repay it soon after. You only have until the tax return date of that year to repay the loan. So, for example, if you lost your job at the company in March, you only have one month to repay the loan in full. If you fail to repay the loan on time, you will be fined 10% by the IRS.

401k Recordings

Pros

There is normally a 10% penalty from the IRS when you withdraw money from your 401k. However, there are some exceptions to this.

You can withdraw without penalty if you are 59 and a half years or older, or if you qualify for a withdrawal due to hardship. With the withdrawal, you don’t have to pay back the money, and that means you don’t pay interest like you would with a loan.

401k Recordings |  How do they work?Cons

Withdrawing money from your 401k early is considered income by the IRS and this is the reason for the 10% penalty.

Unless you qualify for a hardship withdrawal or are old enough not to be charged, this will be quite a reduction in the amount you can use for your down payment.

So if you withdraw $30,000 from your 401k, you will be charged $3,000.

While there are benefits to a larger down payment, withdrawing money reduces your retirement savings and pays more taxes that you could have avoided.

How do you qualify for a hardship withdrawal?

The IRS will not charge you a 10% penalty if you need to cover medical expenses. If you don’t have medical insurance or adequate coverage, the IRS will allow you to withdraw without penalty.

The unemployed can take out some money to pay for medical insurance or bills, but only if you lost your job instead of resigning. You must also have applied for unemployment benefits for 12 consecutive weeks.

Even without meeting these hardship reasons, you can still withdraw without penalty. For example, if you have no other way for yourself or a dependent to pay the higher education bills, you can file a claim.


When buying a home it can be hard to find a large down payment, but if you’ve saved money in a 401k you may be wondering if you should use it, and here are some pros and cons to consider. #real estate #home purchases

Is it better to take money from your 401k to avoid PMI?

While PMI is expensive if you don’t have 20% equity in your home, it probably won’t cost you more than the money you would lose by reducing your retirement funds.

PMI can cost you about 1%, which can be a few thousand dollars a year. However, this means that you will stop investing in your retirement plan for 5 years, missing out on employer contributions and compound interest. Not to mention the 10% penalty or interest you have to pay for withdrawals or loans, it’s going to end a lot worse.

What are the alternatives to increase your deposit?

While a 20% deposit is ideal, it is not necessary. However, you will get better terms on your loan if you can find 20% for the down payment, including no obligation to pay private mortgage insurance and lower interest rates.

Low and no mortgage down payment optionsInstead there are low and even no down payment mortgages. For example:

* FHA loans allow deposits as low as 3.5%
* Both VA loans and USDA loans offer zero to eligible people
* Conventional loans can even allow a down payment of as little as 3%

Even if you don’t qualify for 0%, there are other things you can do. There are down payment programs in every state that can give you a scholarship. You can also ask a friend or relative to give you money to pay for the deposit, although there are some rules that you must follow for this.

You may be able to find a lender with a special program that provides credit to cover down payments and closing costs. Don’t consider using your 401k until you’ve exhausted all your other options.

Final Thoughts

Dive into you 401k may sound like the perfect solution to buying a house. However, there can be expensive consequences to using that money, consequences that can negatively affect your retirement. So before you decide to use your 401k to buy a home, weigh all your options.

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When buying a home it can be hard to find a large down payment, but if you’ve saved money in a 401k you may be wondering if you should use it, and here are some pros and cons to consider. #real estate #home purchases

About the author

Top Wellington broker, Michelle Gibson, wrote: “Using Your 401k to Buy a Home | What You Need to Know”

Michelle has specialized in residential real estate in Wellington, Florida and the surrounding area since 2001. Whether you want to buy, sell or rent, she guides you through the entire real estate transaction. If you’re ready to put Michelle’s knowledge and expertise to use, call or email her today.

Service areas include Wellington, Lake Worth, Royal Palm Beach, Boynton Beach, West Palm Beach, Loxahatchee, Greenacres, and more.

Using your 401k to buy a house | What you need to know



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