Can I Use My 401K to Buy a House?
Can I Use My 401k to Buy a House?
Your 401k provides you with income after you retire and peace of mind for your future. But that is not the only way your 401k can benefit you. You can also use your 401k to purchase a home. In fact, there are actually two ways you can do this. Let's take a look at your options for buying a house with your 401k.
Technically, you have the ability to withdrawal from your 401k before you retire, but this will come with some downsides. Most notably, you will be penalized 10% for early withdrawal. An early withdrawal is considered any withdrawal made before you are 59 ½ years old or before you are 55 if you have left or lost your job. Making this kind of withdrawal is considered a hardship withdrawal; You must gather evidence that you are experiencing a financial emergency to get your withdrawal approved.
There are some exceptions to this penalty. If you're using the money to purchase a home that will be your main residence, this is considered an exemption. But you'll have a hard time getting the exemption approved if you have other assets that you could have used to finance the purchase. Whether or not the withdrawal is approved, you can expect the withdrawal amount to be taxed like income.
No matter how you look at it, this isn't the ideal way to buy a house. However, if you're in a bind, it may be your only option.
If buying a house with your 401k seems necessary for your situation, the ideal option is taking out a 401k loan. You won’t be penalized for an early withdrawal and you also won't have to worry about the withdrawal being taxed as income. This kind of loan shouldn't damage your credit score and it won’t be factored into your debt-to-income ratio.
There are still limits on 401k loans. You can only withdraw $50,000 or less, and you must pay it back with interest. Typically, interest rates for this kind of loan run in the 1% to 2% range. The time that it takes you to repay this loan will also be time you miss out on contributing to your 401k. Your employer won’t be able to match contributions either since your contributions will be zero until the loan is repaid.
If you end up leaving your job or you get laid off before you paid back your loan, your repayment window will shorten, making it even more difficult to pay back the loan. If you can’t pay the full amount off by the next tax filing date, your loan is considered a 401k withdrawal, and, thus, you'll be penalized the 10%. Again, this isn’t an ideal option. However, if you feel confident in the stability of your career and your ability to pay back the loan quickly, it may still work out.
Discover Your Loan Options with the Carolina Mortgage Team
If you want to make sure you've explored all your mortgage options, talk to the Carolina Mortgage Team at Revolution Mortgage. We'll help make borrowing for your house an easy process. Schedule your appointment with us today!