If you’re looking to buy a house and have been told that you can use your 401(k) as an asset, you might be wondering whether that’s true—and if so, what it means for your home-buying journey. While it’s possible to tap into your 401(k) to help with purchasing a home, there are important considerations, benefits, and drawbacks to keep in mind before making a decision.
How Your 401(k) Can Be Used in Home Buying
A 401(k) is a retirement savings account that allows employees to contribute a portion of their paycheck, often with employer matching. Typically, you save these funds for retirement, but you may have a few ways to leverage your 401(k) to buy a home.
1. Taking a 401(k) Loan
Many 401(k) plans allow participants to take out a loan against their account balance. If your plan permits loans, you can usually borrow up to 50% of your vested balance, or a maximum of $50,000, whichever is lower.
Advantages of a 401(k) Loan:
- No credit check – Since you’re borrowing from yourself, it won’t impact your credit score.
- Competitive interest rates – The interest you pay goes back into your 401(k) account.
- Quick access to funds – You can receive the loan within a few days.
Disadvantages of a 401(k) Loan:
- Repayment is required – You typically must repay the loan within five years. If you leave your job, repayment may be due sooner.
- Potential impact on retirement savings – Money withdrawn is no longer growing through investments.
- Limited borrowing amount – Depending on your balance, the amount you can borrow may not cover all your home-buying needs.
2. 401(k) Hardship Withdrawal
Some 401(k) plans allow for hardship withdrawals to cover major expenses, such as buying a primary residence. However, there are strict eligibility criteria, and you may be subject to penalties and taxes.
Advantages of a 401(k) Hardship Withdrawal:
- Access to your money – If approved, you can use the funds for your home purchase.
- No repayment required – Unlike a loan, a withdrawal does not need to be repaid.
Disadvantages of a 401(k) Hardship Withdrawal:
- Taxes and penalties – You may face a 10% early withdrawal penalty if you’re under 59½, plus income taxes on the withdrawn amount.
- Loss of future growth – Withdrawing these funds removes them from retirement investments and future growth.
- Strict qualification rules – You must prove financial hardship and that the funds are essential to the purchase.
How Lenders View 401(k) Assets in Mortgage Applications
When applying for a mortgage, lenders assess your assets, income, credit history, and debts to determine loan eligibility. While your 401(k) may be considered an asset, lenders generally treat it differently than liquid assets like cash in a savings account.
Liquid vs. Non-Liquid Assets
Lenders classify assets as liquid (easily accessible) or non-liquid (not easily converted to cash).
- A 401(k) is a non-liquid asset because withdrawing or borrowing from it requires a process and potential penalties.
- Lenders may include vested 401(k) funds in your overall net worth, but they may not count them toward your available cash reserves unless they are withdrawn or loaned.
Using a 401(k) to Strengthen Mortgage Approval
Even if you don’t withdraw from your 401(k), listing it as an asset on your mortgage application can demonstrate financial stability. Lenders may view it as a sign that you have financial reserves, which could improve your chances of loan approval.
Should You Use Your 401(k) for a Home Purchase?
While using it may be an option, it’s important to weigh the pros and cons carefully.
When It Might Make Sense:
You should consider borrowing from your 401(k) only if you have no other options for covering the down payment or closing costs, ensuring it won’t put your retirement at risk. Additionally, you must be confident in your ability to repay the loan without compromising your long-term savings. Lastly, the home purchase should offer significant financial benefits, improving your overall stability in the future.
When to Avoid It:
You should avoid borrowing from your 401(k) if you have other accessible funds, such as savings or investments, that won’t result in penalties. Additionally, if withdrawing would set you back on your retirement savings goals or if the cost of penalties and taxes outweighs the benefits of homeownership, it may not be a wise financial decision.
Explore Other Financing Options with Scout Lending
If you’re considering using your 401(k) to buy a home, it’s important to explore alternative financing options that could help you achieve homeownership without tapping into your retirement savings. At Scout Lending, we specialize in helping homebuyers navigate their financing options, including:
- Conventional and FHA Loans
- Low Down Payment Programs
- First-Time Homebuyer Assistance
- VA and USDA Loans
- Down Payment Assistance Programs
Our team at Scout Lending works hard to find the best mortgage solution for your financial needs. Before making any decisions about using your 401(k), let’s explore all your options together.
Get Started Today!
Buying a home is one of the most significant financial decisions you’ll make. Don’t navigate it alone—let Scout Lending help you find the best path to homeownership. Contact us today to discuss your mortgage options and secure the financing that works best for you!
