Don’t make this common 401K home buying mistake

One excellent way to buy a house is to borrow money from your 401k. Every 401K provider is different, and the language associated with your 401k provider can make or break your ability to buy a home. Here’s what you need to know if you’re borrowing money from your 401k to purchase a house.

For many families wishing to upgrade to homeownership one of the biggest challenges that people have is coming up with a down payment. Coming up with several thousand dollars for a down payment is no easy feat. Many times, people can pull the money from their 401k account as the 401K as the 401K is the biggest savings vehicle most W2 families have.

If you’re in a position where you don’t have any money saved for a down payment and you’re thinking down payment assistance, but you have a ton of money in your 401k rethink that approach. Getting the money from the 401 k is the most operative beneficial thing that you can do. Down payment assistance programs typically have income requirements, very stringent debt to income ratio requirements and the interest rates are quite a bit higher and you end up financing your down payment anyway.

So, if you borrow the money from your qualified plan most 401K providers will let you borrow up to as much as 70% of the account value to use to purchase a house. That can mean the difference between getting a very low mortgage payment and a very high mortgage payment when otherwise not using the 401K.

Here’s the one thing to follow very closely with your 401k, if for whatever reason you already have a 401k loan on your current 401k account you need to be very careful on your next steps. Most 401K accounts contain special language that says if you have a loan against your 401k you cannot access the money in your 401k account at all (even for reserves which you might need for your mortgage loan) until that loan is paid off in full which is going to require cash.

Here’s where things get dicey if you have a 401k loan on your account and you are desiring to monies from your 401k, and you’re buying a primary home most 401K providers will let you do it under what’s called a hardship. A hardship allows you to withdraw the money which causes you to get taxed and penalized on those funds because there’s a 401k loan already on the 401k account. It’s critical that you have this information at your fingertips in the pre-approval process prior to making an offer on a house.

The 401K loans are usually beneficial if you have no loan on the 401k already.  This is the ideal approach as you can borrow the money in most cases pre-tax which results in the lower mortgage payment and lower 401k payment.

 

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