How to Use a 401(K) for a Home Loan
Without a down payment, it may be impossible to secure a home loan. If you have a 401(k) through your employer, however, you may have the option to cash it out and put the money toward a home purchase. A 401(k) is an investment plan serviced by your employer. A certain percentage of your earnings each pay period is deposited into your 401(k). Once you reach retirement, you may cash out the 401(k) plan. In some situations, you may be permitted to cash out your 401(k), or a portion of it, early by claiming a hardship withdrawal. The IRS sets certain restrictions on the circumstances that justify cashing out a 401(k), but does permit individuals to withdraw from their retirement plans if the money is to be put toward a home purchase.
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Instructions
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Verify that your employer permits 401(k) hardship withdrawals. An employer may choose to impose additional restrictions on 401(k) withdrawals beyond the basic restrictions imposed by the IRS. Because of this, an employer has the right to deny employees the ability to cash out any portion of their 401(k) plans early.
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Calculate how much money you need. You will not be permitted to withdraw any money from your 401(k) in excess of what you actually need.
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Check with your employer to find out what documentation you need to provide to procure a hardship withdrawal. Some employers require you to provide a "proof of need" which is evidence that you actually need the funds. Others, however, may not require this.
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Fill out a formal request to withdraw the funds. Expect to be charged a 10% early withdrawal fee if you are younger than 59 ½. You must also pay taxes on the amount you withdraw.
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Wait for your check to be processed and either mailed to you or directly deposited into your checking account.
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Provide proof of the funds to your lender. Your loan officer will want to see proof that you have the money in your account before proceeding with your mortgage financing.
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Bring the funds with you to the closing. You will need to pay your down payment and prepaid costs, often referred to simply as "closing costs" when you arrive at closing.
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Tips & Warnings
You may also consider taking a loan from your 401(k). Although you do have to pay the loan back over time, if your employer does not permit early withdrawals for a hardship, a 401(k) loan is an option.
You will not be allowed to withdraw early any funds that your employer deposited. Only deposits you yourself have made.
If your employer does not require you to prove that you need the funds, you may be restricted from making contributions to your 401(k) plan for six months after the withdrawal.
