• Home / 
  • Learn / 
  • Buying a Home From Your 401k Retirement Plan
Dan Green
Dan Green

Dan Green

Homebuyer.com

Dan Green has helped millions of people achieve their American Dream of homeownership. Dan has developed dozens of tools, written thousands of mortgage articles, and recorded hundreds of educational videos. .

Dan Green

Dan Green

Homebuyer.com

Dan Green has helped millions of people achieve their American Dream of homeownership. Dan has developed dozens of tools, written thousands of mortgage articles, and recorded hundreds of educational videos. .

Black Family Painting House Wall

This website discusses mortgage programs and how to qualify. Your eligibility may vary based on lender guidelines and investor overlays. Check with your lender for specific details.

Trusted Content
Homebuyer Logo

Trusted Content

This article was checked for accuracy as of September 23, 2024. Learn more about our commitments to accuracy and your mortgage education in our editorial guidelines.

Homebuyer Logo

Trusted Content

This article was checked for accuracy as of September 23, 2024. Learn more about our commitments to accuracy and your mortgage education in our editorial guidelines.

Updated: September 23, 2024

Buying a Home From Your 401k Retirement Plan

Please note that this article does not constitute tax advice. For any specific tax-related questions, we strongly recommend consulting a licensed tax professional.

First-time buyers can buy a house using money from their 401(k) retirement plan. However, now that low-down payment mortgages are prevalent and available, for many people, buying a house with 401(k) retirement money is a last resort.

This article talks about 401(k) retirement loans for home buyers.

How The 401(k) Retirement Plan Works

401(k) retirement plans are investment accounts with automatic tax breaks.

Congress made 401(k) plans possible in the Revenue Act of 1978. The bi-partisan tax bill modified the Internal Revenue Code Section 401(k) to eliminate taxes on deferred employee compensation.

The law allowed workers set aside portion of their paycheck for retirement without being taxed on that money immediately, giving them additional dollars to put into their account.

By 1981, the IRS changed its rules so employers could fund retirement plans, too, and today, more than half of U.S. workers participate in an employee-sponsored 401(k) retirement plan.

The IRS supports two 401(k) plan types:

  • Traditional 401(k): Contribute tax-free and pay taxes upon withdrawal.
  • Roth 401(k): Contribute taxed dollars and pay no taxes upon withdrawal. 

Employers typically provide a traditional 401(k) or a Roth 401(k) plan as part of an employee benefits package. 

We'll help you match a lender →

Accessing Money In Your 401(k) Plan

According to the IRS, first-time home buyers can withdraw up to $10,000 penalty-free from their 401(k) to purchase a home.

However, when you take money from your 401(k), you’re taking money from your future retirement, which is why most people don’t use a 401(k) to buy a home unless:

  1. They don’t qualify for a low-downpayment mortgage
  2. They receive specific 401(k) tax advice from an accountant

If you decide using a 401(k) loan to buy a home is necessary, there are two ways to do it: 401(k) loans and 401(k) withdrawals. Consult with an accountant about the tax implications of each path.

The 401(k) Loan

401(k) loans let employees borrow money from their 401(k) balances and pay it back at an interest rate determined by a plan administrator.

Withdrawals are typically limited to 50% of the account’s total value, with a $50,000 limit. Loans must be repaid within 5 years, and until the loan is paid in full, buyers may not make new 401(k) contributions.

Additionally, if you leave your job or cannot repay the loan, the outstanding balance could be treated as a taxable withdrawal, potentially incurring penalties which reduces your retirement savings.

The 401(k) Withdrawal

A 401(k) withdrawal liquidates some or all of an employee’s retirement account and pays it out as cash. 

The employee is not obligated to repay or replace the cash withdrawn from the 401(k) account, but the IRS will recapture 10% of the amount withdrawn as part of the year’s federal tax filing. Money withdrawn may also count the withdrawal as taxable income.

Employees may continue to make 401(k) contributions after a withdrawal until annual contribution limits are reached.

401(k) Loan vs 401(k) Withdrawal

401(k) Loan 401(k) Withdrawal
Repaid with interest Not repaid
Non-taxable income Taxable Income
No early withdrawal penalty 10% early withdrawal penalty
Contributions paused until loan is repaid Contributions continue as-is
May be due with job change Not affected with job change
Limited to 50%, not to exceed $50,000 Limited to down payment and closing costs

Low Down Payment Alternatives To Using a 401(k) 

Using a 401(k) to buy a home may be unnecessary for a first-time home buyer.

Most mortgage lenders allow low- and no-downpayment mortgage loans, and the typical first-time home buyer rarely makes a sizeable down payment anyway. The typical first-time home buyer makes a down payment of approximately seven percent.

Here are some popular mortgage alternatives to withdrawing from a 401(k):

Conventional 100

The Conventional 100 mortgage is a first-time home buyer program that requires no money down and offers lower-than-average interest rates and mortgage insurance premiums. The program is limited to 1-unit homes, including standalone homes, townhomes, and condominiums. Eligible buyers must have average credit scores or better.

HomeReady

HomeReady is a 3-percent down mortgage backed by Fannie Mae. It provides below market average mortgage rates to eligible buyers and allows downpayment funds from savings, cash gifts, and most other sources. HomeReady is good for buyers with low- to moderate-income and below-average credit scores. 

Home Possible

Home Possible is Freddie Mac’s version of the 3-percent down mortgage. Like HomeReady, Home Possible gives below-market interest rates to eligible buyers and offers reduced mortgage insurance rates. HomeReady is best for buyers with low- to moderate-income and average credit scores or better. 

Conventional 97

Conventional 97 is a branded name for Fannie Mae’s and Freddie Mac’s standard 97 loan-to-value mortgage loan. Conventional 97 requires buyers to make a three percent downpayment and complete an online homeownership education course before closing. Conventional 97 is good for buyers with decent credit scores who borrow within conforming mortgage loan limits

FHA Mortgages

FHA mortgages are the original low-down-payment mortgages. Since 1934, FHA mortgages allow 3.5% down payments for buyers of all credit types and incomes. FHA mortgages are good for home buyers with average credit scores or below and buyers of multi-unit homes

VA Mortgages

VA mortgages are mortgages backed by the Department of Veterans Affairs. Established as part of the G.I. Bill in 1944, VA loans allow 100% financing with no mortgage insurance and at low-interest rates. VA loans are limited to active duty military, veterans, and surviving spouses. 

USDA Mortgages

USDA mortgages are mortgages backed by the U.S. Department of Agriculture. USDA loans allow buyers to purchase homes in the USDA eligibility map with no money down. USDA mortgage rates are often lower than conventional mortgage rates, and its mortgage insurance rates are reduced.

First-Time Home Buyer Programs

Federal, state, and local governments make downpayment assistance programs, tax credits, and cash grants for first-time buyers. In addition, Congress is considering multiple programs to make it easier for first-time buyers to fund a downpayment and purchase a home.

See all available first-time home buyer grants and programs.

Ready For Offers?

See which lenders are giving the best deals. Check out our listings now.

See Lenders
Homebuyer.com is not a lender or mortgage broker. We don't collect personal information or make credit decisions. We connect you with qualified lenders who may offer mortgage services.

Find lenders offering your perfect mortgage

We organize options. You choose who to work with.
Homebuyer.com is not a lender or mortgage broker. We don't provide quotes or credit decisions. We display links to lenders who may offer services.

Homebuyer.com is a mortgage information and comparison website. We are not a mortgage lender or broker and do not originate loans, collect personal information, or make credit decisions.

Homebuyer.com is operated by:
Growella Inc.
1311 Vine St, First Floor
Cincinnati, OH 45202
hello@homebuyer.com

Equal Housing Opportunity

Notices

Links

Mortgages

Tools

© 2021-2025 Homebuyer.com. Neither Homebuyer.com nor Growella Inc. is a mortgage lender or broker and neither originates loans nor makes credit decisions. The content on this site is intended for informational purposes only and should not be considered financial or legal advice. Nothing on this website constitutes a loan commitment or interest rate lock agreement. Homebuyer.com does not endorse or control the content, policies, or practices of participating lenders or their external websites. Always ask for a Loan Estimate when evaluating any mortgage loan proposal. This site is not affiliated with any government agency. This website and our services are not available in Connecticut, Illinois, Maryland, Minnesota, Nevada, North Carolina, North Dakota, Oregon, Vermont, or West Virginia. This website is not approved for use in the State of New York. Equal Housing Opportunity.