Homebuyers

As a First-Time Homebuyer, Can I Use My 401(k) for a Down Payment?

In short, yes—first-time homebuyers can tap their 401(k) to fund a down payment in two ways: a 401(k) loan or a 401(k) withdrawal.

A 401(k) loan lets you borrow from yourself and pay the balance back, sidestepping the 10% early-distribution penalty and current income tax—so long as you stick to the repayment rules.

However, a 401(k) withdrawal has no repayment strings but hits you with taxes. If you’re under 59½, you must also pay a 10% penalty.

So, why would you use a 401(k) in the first place? While entering the housing market is nerve-wracking for most buyers, it can be especially stressful for those trying to gather the necessary funds for a down payment. This has led some first-time homebuyers to consider non-traditional sources, such as their 401(k), to get the money they need.

“You can tap your 401(k) for a first home, but it’s not a one-size-fits-all solution,” said Jeff Goodman, a real estate professional at New York’s Brown Harris Stevens. “In many plans, you can either take a loan from your balance, paying it back with interest to yourself, or pull money out through a hardship withdrawal, which can come with taxes and penalties.”

Here’s everything first-time homebuyers need to know about how, and if you should, use your 401(k) as a source for a down payment.

Can a 401(k) help you make a down payment?

First things first, your 401(k) is your money to use at your discretion. While it doesn’t function the same way as a standard deposit account at the bank, you still have the right to access it. If you’re like many, your 401(k) is your largest financial account, and it can certainly be tempting to use these funds as the source of your down payment.

However, there are some drawbacks to this strategy, including penalties, taxes, and potential repayment requirements.

By design, your 401(k) is a retirement account meant to last you well into your golden years, so you shouldn’t just freely dip into it here and there. Until you turn 59 ½ (or 55 if you’re no longer working), there is a 10% early withdrawal penalty on any money you take out. Additionally, you will have to pay income tax on the amount withdrawn.

If you believe using the funds in your 401(k) is a good choice for you, you have two options for accessing your money: a 401(k) loan or a 401(k) withdrawal.

Using a 401(k) loan for a down payment  

A 401(k) loan lets you tap the lesser of 50% of your vested balance or up to $50,000—and pay yourself back over time. Most repayment schedules run about five years. However, some plans give you a longer repayment period if the money is for a primary residence.

“Since you are borrowing against yourself, interest paid goes back into your 401(k), building the balance,” said Jonathan Ford, president and financial advisor at JFJ advisory services.

Your payments must be consistent (at least quarterly), and most plans set interest at the prime rate plus one or two points. (These IRS loan rules explain all the fine print.)

Upsides of using a 401(k) loan for a down payment: You won’t pay a 10% early withdrawal penalty and you won’t have a current income tax hit.

Generally, these loans aren’t reported to credit bureaus, so they’re unlikely to affect the debt-to-income ratios that are evaluated to determine mortgage qualifications. Some mortgage underwriters don’t even count it as debt—though you should always confirm with both your plan administrator and your lender.

However, depending on the loan type you’re applying for, this may not necessarily be the case. As always, it’s best to work alongside a qualified loan officer when securing funding for a home purchase.

Risks of using a 401(k) loan for a down payment: There are also some downsides and potential risks associated with 401(k) loans. First, you won’t be able to make any new 401(k) contributions while you’re paying off your loan, and your employer won’t be contributing either. Compound that with the potential interest you’re missing out on, and it could make a pretty big impact on your retirement savings.

If you leave your job before the loan is paid off, the remaining balance can be “offset.” This means it is treated as a taxable distribution unless you replace the funds by your tax filing deadline. Any money not repaid by the due date will be considered a withdrawal and is subject to all penalties and taxes that entail. (These IRS plan loan offset rules spell everything out.)

Using a 401(k) withdrawal for a down payment

A 401(k) withdrawal is the more straightforward, but often more costly, way to access your retirement funds for a home purchase. You simply take the money out, no repayment required.

The catch? Unless you are 59½ or older (or 55 and separated from your employer), you’ll owe a 10% early withdrawal penalty on top of regular income tax for the amount you withdraw. (Check out these IRS early withdrawal rules.) Also, you lose the security of knowing that this money will be paid back to your account for retirement.

Upsides of using a 401(k) withdrawal for a down payment: You get immediate access to the funds with no repayment schedule hanging over your head. That can be appealing if your budget is already stretched thin with a new mortgage.

Risks of using a 401(k) withdrawal for a down payment: The money is permanently removed from your retirement savings, so you lose both the principal and any future compound growth. Unlike a loan, you can’t “pay yourself back” to restore the balance.

You’ll also need to factor in the combined hit of taxes and penalties, which can significantly shrink the amount available for your down payment.

Pros and cons of using a 401(k) for a down payment

Pros of a 401(k) loan

Borrowing from your 401(k) the right way means no 10% early withdrawal penalty and no current income tax. The interest you pay goes right back into your own account, and arranging the loan is typically faster than securing other types of financing.

Pros of a 401(k) withdrawal

You won’t have a monthly repayment hanging over you, which can keep your mortgage more affordable in the short term.

Cons of a 401(k) loan or 401(k) withdrawal

The biggest trade-off is shrinking your retirement savings and missing out on future growth. If you take a loan and leave your job before it’s repaid, the remaining balance can be treated as a taxable “offset.” And with withdrawals, you’ll face both income taxes and the 10% penalty, unless you qualify for an IRS exception.

Decision-making guide: 401(k) loan vs. 401(k) withdrawal

A 401(k) loan may be best if: You expect to stay in your job for several years, your budget can absorb the payment alongside your mortgage, and you want to avoid taxes and penalties.

A 401(k) withdrawal may be best if: You can’t commit to repayment, you anticipate a job change soon, and you accept the permanent hit to your retirement balance for immediate liquidity.

To help decide, consider your:

• Employment status: Any job change could turn a loan into taxable income.
• Cash flow: Loan payments reduce your take-home pay and withdrawals shrink your available down payment after taxes.
• Risk tolerance: Decide if avoiding a tax bill outweighs the security of no repayment obligation.
• Alternatives: Down payment assistance, low-down-payment loans, or gift funds may be cheaper long-term.

Example loan scenario for a first-time buyer

Let’s break down the different ways you can use your 401(k). Ava, a first-time buyer, is short on cash for a down payment on a home. She decides to tap her 401(k) for $25,000.

401(k) loan route: Ava borrows the $25,000 from herself at 7% interest over five years, making payments of about $495 a month. There’s no tax or penalty now, and the interest she pays lands right back in her retirement account.

But if she leaves her job with $12,000 still outstanding, she has until her next tax filing deadline to repay it—or the IRS will treat it as a withdrawal, hitting her with taxes and a 10% penalty.

401(k) withdrawal route: Instead, Ava could simply withdraw the $25,000. But at a 22% marginal tax rate, she owes around $5,500 in taxes plus a $2,500 penalty. That leaves her just $17,000 for her down payment. And that chunk of retirement savings is gone for good.

Bottom line: A 401(k) loan preserves more of your long-term savings and sidesteps an immediate tax hit, but it locks you into your job until the debt is repaid.

A withdrawal frees you from monthly payments, but taxes and penalties shrink your buying power and permanently reduce your nest egg.

Repayment if you change jobs

Leaving your job, or if your 401(k) plan shuts down, doesn’t make your loan disappear. Any unpaid balance can be “offset” and reported to you on Form 1099-R. That’s the IRS’s way of saying: this could now count as a withdrawal.

You do get a grace period: until your federal tax filing deadline (including extensions) to roll over the same amount into another eligible retirement account. Do that and you’ll sidestep both income tax and the 10% early withdrawal penalty.

Miss that window? The IRS will treat the balance as a taxable distribution, meaning you’ll owe ordinary income tax. If you’re under 59½, you will owe the penalty, too. (Read more on IRS rollover rules.)

Best option for first-time buyers considering using their 401(k) accounts

For many, a 401(k) loan creates fewer upfront costs than a withdrawal and offers a path to restore your retirement balance. Still, it should be a last resort move after exhausting other down payment sources. A withdrawal is easier but far more expensive once taxes and penalties are factored in.

Before you decide to take this approach, we strongly recommend that you speak with a loan officer or other financial professional for complete details and information about other options that may be available.

Are there other options?

Certainly. We encourage you to talk to a loan officer to learn about other Conventional loans and government-sponsored programs (including low and no down payment options) that could help you get into your new home.

Additionally, we offer a mortgage calculator that can help you begin thinking about your budget.