Whether you’re a first-time buyer or not, you can find great loan programs out there that accept a lower down payment without having to pay mortgage insurance.
So don’t feel like you have to pull out all the stops and liquidate everything to make a down payment.
But, if you do want to put more down than you currently have and you don’t want to get help from family, then here’s another option to consider:
You can borrow from yourself if you have a 401k plan.
Show Me My Money
Getting a 401k loan is one way to get additional money toward a down payment. It’s a lump sum of money that is all yours … not the bank’s, not mom and dad’s, and not anyone else’s!
I understand if you may be wary of using any of your retirement funds now. That’s why you need to evaluate the long-term pros and cons of borrowing this money.
Take some time to review our highlights below of what you can typically expect if you borrow or withdraw money from your 401k account.
Borrow from Yourself
Remember you’ll need to double check to see if your particular 401k plan offers a loan option. And, I recommend that you consult with your own tax adviser before you pursue anything.
Many 401k plans offer loans unlike IRAs, which only offer early withdrawals. Here is some key information on typical 401k loans:
Up to 50% of your vested account balance can be borrowed, with a maximum of $50,000. You usually have to be currently employed by the sponsoring employer of your plan.
No credit check or approval by a lender required. However, your mortgage lender will consider this loan when it evaluates you for a mortgage. Smaller loan amounts won’t affect your mortgage qualification as much. Check with your mortgage lender if you are thinking of taking this loan for your down payment.
Lower interest rate than standard loans. And, you’ll be paying yourself that interest (along with the principal) back into your account, not the bank. However, interest payments aren’t tax deductible, so that’s one cost of borrowing from your account. And, you won’t be earning any interest on the money that’s no longer in your account.
Full repayment required within 5 years. Yes, you’ll need to repay back this loan to yourself. Can be automatically deducted from your paycheck monthly into your 401k account.
60-to-90- day time period to pay the loan back in full if you leave your job before repayment. Or you will incur a 10% penalty and have it taxed as income. So don’t plan on changing jobs or getting fired during the repayment period!
Withdrawal of Funds
You may also have the option of withdrawing the funds rather than setting up a loan. However, there are usually stringent restrictions in order for your employer to allow in-service withdrawals.
For example, you won’t be approved for a “hardship exemption” since you’re using it for a down payment on a home.
If you are allowed to withdraw funds, you’ll owe income tax on that amount and receive a 10% penalty for this early withdrawal.
As you can see, borrowing from your 401k plan can be a more viable option for many first-time buyers than a complete withdrawal.
Check with your tax adviser and mortgage lender to learn any specific ramifications you may face with a 401k loan or withdrawal. You can see if a small loan to bump up your down payment funds is worth it or not.
Seek Out Help
Everyone’s financial situation is different and you have to make the best choice for YOUR particular situation.
So please reach out to me for help and also meet with your financial and tax advisors to ensure you’re making the right decisions based on your specific long- and short-term goals.
Remember that what your friends or coworkers have decided may or may not be the best option for you.