First Time Home Buyer? How to Use Your 401(k) as a Down Payment

Daniel Penzing
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Question 1: What is your current vested balance?

Question 2: How much are you able to withdraw or borrow from your 401(k)?

You can withdraw a substantial amount from your 401(k) early but you will have to pay long-term income taxes and a 10% penalty. If you plan to use the amount for retirement or substantial home down-payment, it makes sense to take out a loan from your 401(k) and pay back as much as you can afford.

There is the option of borrowing from the 401(k) plan that you are a participant in. The amount you are able to borrow will be based on the rules and regulations of the plan and the distribution restrictions.

There are 2 ways that you are able to borrow from the 401(k) account and one is through a loan and another option is through a hardship withdrawal but both have their own set of rules and regulations. If you are struggling to cover your expenses or need to make a major purchase it is a good idea to speak to the financial adviser in the bank or the plan manager.

Hardship Withdrawal Option:

A 401(k) plan allows you to borrow from your account through a hardship withdrawal. A hardship withdrawal has different limits depending on how old you are at withdrawal.

For those aged 59 ½ and older, the limit for hardship withdrawals is determined by life expectancy or a predetermined amount, whichever is less. For those under the age of 59 ½, the limit is determined by the IRS.

Withdrawing money from your 401(k) with hardship is a last resort, as you must pay taxes on the amount you withdraw, as well as a 10% early withdrawal penalty if you are under 55.

Before you take this option, you should try other alternatives. Talk to your spouse about budgeting. If you lack income outside of your 401(k), try applying for different positions.

If you have reached retirement age, consider taking early retirement. These are the main alternative options; but if none of these options are available for you, then hardship may be your only solution.

Generally, hardship means you have a medical emergency or severe financial hardship. These are considered severe. The IRS also recognizes some other reasons as qualifying for hardship, but these are not always recognized as severe.

For example, buying a home would generally not be considered a valid reason, unless you are buying it with a loan that you will be unable to pay if you do not withdraw from your 401(k).

401(k) Loan Option:

If you are looking to become a first-time home buyer, are you also wondering about first-time home buyer programs? Many first-time home buyers use their 401(k) plan to purchase a house, and by doing so they are able to get a jump-start on saving for retirement.

There are additional advantages to using a 401(k) loan to purchase a house. First, you are not required to pay the loan back until after you retire. Second, the interest payments in a 401(k) loan are tax-deductible. These tax advantages can really add up over time.

Follow the steps below to find out how to take advantage of a 401(k) loan to buy a house.

401(k) Loan Option Plus Hardship Withdrawal (Without Penalty)

Are you the recent college graduate who has just received your first job, or maybe a spouse with a part-time job who makes a decent income? Are you a first time homebuyer who wants to purchase a nice home that will last you for many years to come, but you’re short of a few dollars?

What can you do?

The first thing you can do is to think big. The world is your oyster, so stop being limited to those cookie-cutter homes for middle-class families. You have the money to buy much more than that, and to be able to do it, you need to do it now because you’re young.

How can you buy a house that would make other people gasp in disbelief?

One of the ways you can accomplish it is to look for 401k loans that are available for first time homebuyers, specifically from your employer. “Heck! I’ve only had this job for a few months,” you say.


Buying a house is a huge investment and you have to be prepared to do it. You have to convince yourself before you. You have to believe that you can do it and you have to know that you are ready and willing to take the risks involved.

Buying a house is a lot more difficult than most people think. There are so many details to look at, so many facts to compare and so many options that you can choose. But if you are ready and if you can pay all of the expenses, then you should go for it.

If it is your first time as a buyer of a house you can be a little nervous. Being nervous is natural, but hope you do not become too nervous. Just be confident and if you have a chance to see your dream house then gone for it.

There are many types of loans available for those who do not have enough down payment. Some of them are: conforming loans, FHA loans, VA loans, USDA loans, non-conforming loans and more. Of course, not all of them are available for you, but you have to look, you have to compare them and you have to be ready to help yourself. You have to use your 401(k) as a down payment.