Using 401k Assets For Your Downpayment
You will hear me say this often, “I look at buying a home as one of the most important financial decisions you will make in your life.” Each decision surrounding your home purchase should be evaluated to make sure that it fits within your short-term and long-term financial goals.
Before making a decision to borrower against or cashing-out a 401k, let’s go over all of your options and then I highly recommend that you meet with your financial planner or CPA to confirm whether or not this is the best choice.
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There are two ways to access your 401k assets to make a down payment on a house.
(1) A 401k Loan
(2) A 401k Hardship Withdrawal
“I think the bigger question isn’t, ‘How’, but ‘Should’ You Use 401k Assets To Purchase A House?”
The IRS looks at 401k assets as long-term investments, and therefore, accessing 401k assets can be risky business due to the potential tax and penalty consequences. Of the two options above, the most common and “safe” approach to accessing 401k assets to purchase a home is through a 401k loan.
A 401k loan is less costly. You simply forgo earnings on the amount borrowed, and pay back the amount borrowed at the rate you were earning the money. From a mortgage pre-approval standpoint, you also need to remember that your 401k loan will be added to your liabilities, increasing your debt-to-income ratio. I help each one of my clients evaluate their situation on a case-by-case basis, so it is hard to say, “One size fits all here“.
What Are the Risks?
The major risks outside of paying fees for a 401k loan, is that in the event you lose your job or change employers, you may be required to pay back the loan entirely within 60 days. The loan may now be treated as a withdrawal and you are subject to fee, penalties, and tax consequences.
As for a hardship withdrawal, I will first advise you to speak to your tax professional and investment advisor in addition to listening to me. With a 401k Hardship Withdrawal, you pay taxes, penalties, and forgo any future earnings on the money you withdraw. As I mentioned previously, the safest approach to accessing 401k assets is through a 401k loan, but it is wise to consider both options as you research the best financial strategy buying a home.
There are a few factors that I advise my clients to consider before making accessing their 401k assets.
(1) Contact a real estate professional to evaluate “real time” market stats in your community
(2) Contact a tax professional to see the “Total Cost” of a withdrawal
(3) Contact your 401k investment bank for their guidelines on 401k withdrawals and loans
(4) My best advice – Consider asking a relative, friend, or employer to “gift” your the money for a down payment versus taking a costly loan or hardship withdrawal. Interest paid is money lost!
It is important that you contact your 401k bank to request and apply for the loan or withdrawl prior to submitting an offer on a home. Often times it can take 4-6 weeks for your bank to issue you a check or wire transfer.
I hope this information is helpful! I look forward to connecting with you soon. For immediate questions, please feel free to reach out to me at (425) 350-7136 (mobile/text) if you may have any questions! If you’ve already applied for a home loan in our office, reach out to Jason at (425) 979-7442 or email us at firstname.lastname@example.org
If you would like to apply for a home loan with us, visit my Mortgage Concierge Page, watch the short video that I made for you and then follow steps one and two! CLICK HERE to apply for a mortgage with Dan Keller and New American Funding!