Can You Use a 401(k) to Buy a House?

If you need cash for your down payment, your 401(k) can supply it in two different ways that come at different expenses.

1. Borrow from your plan and repay it on a schedule, then the IRS takes nothing.
2. A withdrawal that qualifies under a hardship will leave you with a penalty. For example, ending up with $20,000 in hand costs about $9,400 in federal tax and penalty if you're in the 22% bracket.

So the answer to "can you use 401k to buy a house" comes down to whether your pension or retirement account allows it and whether the math works out for you. Weighing a payoff on the mortgages you already have, that's a different decision covered in whether to use your 401(k) to pay off your house.

The loan wins on cost for nearly anyone under 59½ who can afford the payments.

How much of your 401(k) you can borrow

Half the vested account balance is the most that you can normally borrow and the IRS will stop you at $50,000 no matter how big the account is going to be. Someone with $40,000 vested can borrow up to $20,000.

A plan can go a little bit further on a small account and lend up to $10K even if that's more than half but it doesn't have to. The cap counts everything you owe on the plan and the $50,000 shrinks only if the loan balance was higher at any point in the last rolling 12 months.

Paying back a 401(k) loan

The way the law is written gives you 5 years to repay, with level payments due each quarter. But when the funds help buy your primary residence, the plan can grant a much longer window. Major recordkeepers like Fidelity or Vanguard frequently offer 10 or 15 years, and some permit up to 30 years for a primary home.

The plan will want your signed purchase contract from your realtor and will review it before it grants a longer repayment period. A second home and rental or refinance don't qualify.

Say your plan charges an interest rate of prime plus 1% (unlike a commercial mortgage APR paid to a lender, this interest goes directly into your own balance). On an $18,000 loan, your monthly payroll deduction runs roughly $365 over five years, or about half that if your employer allows an extended term for a home purchase.

A hardship withdrawal takes the money out of your retirement savings for good. Buying your principal residence is one of the IRS's standard hardship reasons, covering purchase costs like the down payment and closing costs but not mortgage payments.

The home has to be yours, so a hardship withdrawal can't fund a child's house or a rental.

IRS rules cap the withdrawal at what you need but the amount can include up to the taxes and penalty the withdrawal itself triggers. Your plan doesn't necessarily have to offer a hardship and can make you take the loan first, although since 2020 it cannot block new contributions after the fact.

Expect to show your signed purchase contract and Loan Estimate or Closing Disclosure, unless the plan accepts your written self-certification under SECURE 2.0. Hardship money can't be rolled over into an IRA or another plan.

What an early withdrawal really costs

To net $20,000 for a down payment before 59½, you'd need to withdraw about this much, assuming the whole withdrawal is taxed at your top federal rate:

In the 22% bracket, about a third of the withdrawal gets paid to the IRS before it ever reaches your account. Texas, because it has no state income tax, is a benefit in this scenario.

California taxes the withdrawal as income and adds its own 2.5% tax on early distributions on top of everything else.

Do not rely on the plan's default withholding to cover your actual tax burden. Under IRS early distribution rules, hardship distributions face ordinary income tax at your personal tax bracket plus a 10% penalty under age 59½. Plan administrators withhold a flat 10% by default on Form W-4R, which frequently leaves buyers facing an unexpected bill at tax time.

There's no early distribution penalty exception for buying a home with your workplace plan, but you can avoid the 10% in four situations:

• Borrow instead of withdrawing. A plan loan carries no tax or penalty as long as you repay it on schedule.
• Wait until 59½. The penalty goes away, though income tax still applies, and while you're still working you need a plan that allows in-service withdrawals.
• Leave the job you have in or after the year you turn 55. That employer's plan can pay you without the 10%, and public safety workers can qualify at 50 or after 25 years of service.
• Roll an old employer's plan into an IRA and use the IRA's first-time homebuyer exception, explained next.

Is there a first-time homebuyer exception for a 401(k)?

No unfortunately. That $10,000 penalty break people hear about belongs to IRAs. On the IRS's own chart of penalties the first-time homebuyer row reads "no" under 401(k) plans and "yes" under IRAs.

If you have a 401(k) sitting with an old employer, you may look at rolling this into an IRA with a direct rollover. Because then it will count. If you do this, up to $10,000 can come out for a first-time home with no penalty and the limit covers it for the whole lifetime. A married couple can get $10,000 each ($20,000 total) and income tax still applies to traditional IRA money.

"First-time" only means for you and your spouse (if you're married) if you haven't owned a primary residence in the past 2 years, and the money has to be spent within 120 days.

The trade-off is that the IRA money can't be borrowed on, and if you left that job in or after the year you turned 55, rolling it over gives up the Rule of 55 exit, which has no cap.

A Roth IRA is often the better first thing to look at. Your regular contributions can come out anytime with no taxes and penalties applied.

Every major loan program accepts retirement account funds for the down payment and closing costs. Where they part ways is the fine print:

Does a 401(k) loan affect mortgage approval?

Under Fannie Mae Selling Guide B3-6-05, 401(k) loan payments are usually excluded from your debt-to-income (DTI) ratio because you are repaying yourself. However, what we see at the underwriting desk is specific: underwriters will request the official loan agreement from your 401(k) retirement provider. If your repayment schedule extends beyond five years, certain lender overlays require the underwriter to count that monthly payment right back into your DTI. Even when excluded, your net paycheck takes the hit, so you still have to budget for the monthly payroll deduction.

Using your 401(k) for reserves

You do not have to liquidate your retirement account to count it toward required mortgage reserves. Instead, underwriters require a copy of the plan's terms of withdrawal to validate how you have access to those funds in the event you need them. Under Fannie Mae and FHA guidelines, lenders discount the vested balance to 60% or 70% to account for market volatility and potential distribution penalties, allowing the remaining balance to satisfy Automated Underwriting System reserve requirements.

Documenting the money for underwriting

Where the money gets transferred to inside your checking account, the lender will have to source this deposit because it's likely more than half your monthly income. Save the plan's withdrawal terms or distribution confirmation so that you can give this to your lender.

The credit report that they have on file won't show a plan loan since plans don't report to the credit bureaus. Underwriters will spot it regardless, on the plan statement and in the deductions of your pay stub.

This question will really depend on your situation. Every amount of funds you pull from retirement immediately stops compounding. If you left that investment alone with a 7% yearly average return, the $20,000 from an earlier example would roughly be $77,000 in two decades.

A withdrawal would give up returns for good and just add to your tax bill. With a loan you lose growth on what you still owe and you end up being the one collecting the interest.

A loan makes the most sense for a small gap: the last few thousand toward the minimum down payment on a conventional loan, or the closing costs, with a job you expect to keep. Chasing 20% down just to avoid private mortgage insurance is different: with a withdrawal, the tax and penalty on the extra cash can cost more than several years of PMI.

Hardship withdrawals prior to being 59 1/2 should always be a last resort, as for a buyer with no loan options and a house that really can't wait for anyone.

Low down payment loans and down payment assistance programs

Before you tap retirement funds, look at loans that need less cash up front:

• Conventional loans with 3% down, including HomeReady and Home Possible for buyers under the income limits.
• FHA loans with 3.5% down and a 580 credit score.
• VA and USDA loans with no down payment for eligible buyers.
• Down payment assistance programs, which offer grants or low-interest loans, sometimes forgivable, through state and local agencies.

Gift money works. A family member can hand you the funds with a signed gift letter, and as of February 2026 Fannie Mae also allows gifts from someone with a long-standing family-like or mentoring relationship.

Federal regulations on retirement withdrawals for home purchases remain unchanged heading into late 2026. While economic policy advisors suggested in early 2026 that down payment access rules might expand, the White House did not move forward with the concept, and no executive orders were enacted.

Congress hasn't really given an opinion on this yet. The Home Savings Act (HR 7185) would make retirement withdrawals for a down payment on a purchase or even using it towards closing costs tax-free for 5 years, and other bills would raise the IRA first-time buyer limit. None of these have made it to the Senate floor just yet.

1. Check your retirement plan's rules in the summary section or you can check with your plan administrator. Whether it offers loans or a hardship withdrawal, the home loan term and repayment term will depend on how your plan defines this.
2. Get pre-approved before you move any money, and tell your loan officer the down payment is coming from your 401(k).
3. Compare the loan and the withdrawal fees to your own numbers, then with a tax professional or financial advisor, if the fees are worth it.
4. Request the funds immediately after signing your purchase contract. The single biggest mistake we see buyers make is waiting too long into the escrow period to request the withdrawal; 401(k) plan administrators often take two to four weeks to process disbursements, and a delay here frequently forces buyers to scramble for a formal contract closing extension.
5. If you borrowed, budget the loan repayment next to your new mortgage payment before you sign.