Homebuyers

Should You Borrow from Your 401(k) for a Down Payment? The Rewards and the Risks

Coming up with a down payment for a home has traditionally been one of the biggest obstacles for first-time homebuyers. That’s why some buyers are tapping into their 401(k) accounts. 

The typical first-time homebuyer put down a median 10% down payment in 2025, the highest since 1989, according to the National Association of Realtors (NAR). As the typical home was listed for $415,450 in March, according to Realtor.com, that adds up to $41,545 plus closing costs.

If saving enough for a down payment is challenging, tapping into your retirement savings may look like an attractive option. And for many, borrowing from themselves is. NAR data shows 26% of first-time buyers used financial assets like 401(k)s, IRAs, or stocks to fund their down payment.

“It is great for those clients who have saved mostly in 401(k)s, with little outside resources for that down payment,” said investment advisor representative Catherine Valega, founder of Green Bee Advisory outside of Boston.

While borrowing from your 401(k) can help you come up with a down payment, there are things you should consider first. Here’s what to know before tapping into your retirement funds to buy a home.

The rules of borrowing from your 401(k) to buy a home

The good news is most buyers can borrow from their 401(k) plans. About 84% of 401(k) participants are in plans that allow borrowing from an employer-sponsored 401(k), according to the Employee Benefit Research Institute (EBRI). If your plan allows it, you may be able to borrow up to $50,000 or 50% of your vested balance, whichever is less, according to the IRS.

You may be able to borrow enough from your plan to help you make the down payment. But you need to understand you must pay that money back to your 401(k).

Under IRS rules, you must repay 401(k) loans within five years. However, loans used to purchase a primary residence may be repaid over a longer period.

Typically, you’ll repay through a monthly or quarterly automatic payroll deduction until the loan is fully paid off.

Advantages of taking out a 401(k) loan to buy a home

Despite the risks, there are situations where borrowing from a 401(k) may be worth it. Some of the advantages include:

• No credit check and no impact on your credit score
• The interest you pay goes back into your own account
• The loan may help you put 20% down. This may help you avoid private mortgage insurance (PMI), which may save you thousands of dollars a year
• Any loss in investment growth could potentially be offset by gains if your property rises in value

Using your 401(k) to cover a down payment and closing costs on a home may be best for younger buyers. If retirement is decades ahead, you may have enough time to replenish your retirement funds before you need them.

You could lose out on investment gains by borrowing from your 401(k)

However, there are downsides to using your 401(k) to buy a home, including losing out on stock market gains.

“The biggest problem is that when one takes a loan from a 401(k), even if it is repaid, the money doesn’t get the chance to compound,” said Robert Johnson, PhD, CFA and professor of finance at Creighton University’s Heider College of Business in Omaha, Neb.

That’s the opportunity cost of borrowing from your 401(k). Every dollar you borrow is no longer growing. And even after you repay the loan, you can’t get back the years of compounding you missed while that money was out of the market.

Even worse, some plans also restrict contributions while a loan is outstanding. That means you may not be able to put new money into your 401(k) until the loan is fully repaid.

In that scenario, you would not only lose out on the growth on the borrowed amount, but also miss new contributions that could have been compounding at the same time.

What happens if you leave your job after you’ve borrowed from your 401(k)

This may be the most financially painful risk of borrowing from your 401(k). If you leave or lose your job with an outstanding loan, some plans require you to repay the loan within a short window. This could be in as little as 60 to 90 days.

Check your plan’s details to confirm when you’re required to pay.

If you can’t repay the 401(k) loan in full by the deadline, the due amount may need to be repaid from your account balance.

So, if you still owe $10,000 on your loan but your account has a $60,000 balance, the loan debt may be deducted, according to Experian. That would leave $50,000 in your retirement account.

Tax considerations if you don’t repay your 401(k) loan by the deadline

If you can’t repay your loan from your 401(k) within its term, the outstanding balance may be treated as a taxable distribution. For borrowers under 59½, that could mean owing income tax plus a 10% early withdrawal penalty.

First-time homebuyers using a 401(k) for a down payment should know that the I.R.S. does allow a penalty-free withdrawal of up to $10,000 from an IRA for a home purchase.

Unfortunately, that exception doesn’t apply to 401(k) plans.

Bottom line on borrowing from your 401(k)

Since tapping your retirement savings to cover a down payment could cost you in the long run, it may be wise to consider mortgages with more flexible down payment options.

These include government-backed loans, such as U.S. Department of Veterans Affairs (VA) loans for veterans and members of the military, and  U.S. Department of Agriculture (USDA) loans for those buying outside of cities. These loans don’t require down payments.

Homebuyers may also want to look into Federal Housing Administration (FHA) loans, which require down payments as low as 3.5%.

Additionally, buyers may be eligible for local, state, or other down payment assistance programs. These programs may help buyers cover their down payments and closing costs through low-interest loans and grants.