Many home buyers today are using funds from their employers 401(K) account to provide the down payment obligations on a house. Normally, you cant withdraw money from your 401(K) plan unless you become disables, leave the company, or retire, but many company plans permit certain "hardship withdrawals" in cases where there may be a need to resolve a heavy financial situation, such as the purchase of a principal residence.
It is important to beware of the caveats of hardship withdrawals. There are taxes and penalties involved on the amount withdrawn from your plan. A better way would be to borrow against your 401(K). The interest you pay on the loan goes back into your account, and the money you receive is not taxable as long as its paid back.
A loan from your 401k account is usually at a very good interest rate. This rate will be better than the rate you could get on the second mortgage if you were to try to finance your home purchase with an 80% first mortgage and a 20% second mortgage.
With the large amounts of 100% financing programs available today you should think twice before tapping into your retirement funds. The money you withdraw from your 401K will cost more over the long run then it may be worth in terms of payment reduction. Always consult a financial planner before making this important decision that can affect your financial future.
One thing people don’t consider when taking a loan against their 401(k) is the "opportunity cost". If it takes you a couple years to repay the funds that time that you are missing out on the opportunity for growth in those investments, this could easily be 10% or more.
Not only should you speak to a mortgage professional, but also a retirement specialist as well. He or she should be able to tell you if pulling money out of your 401k is the best decision for you or not. It's always best to look at something long term rather than short term. This is why talking to a professional would be best.
One thing to remember if you are going to take a loan out on your 401k to use for a down payment and/or closing costs is that you will need to document the terms of the loan. Your lender will need to know how much the loan is for, how long the repayment period is and what the monthly payments will be on the loan. This loan will go against your DTI (Debt to Income Ratio). Therefore, have your mortgage broker make sure that you will still qualify for the mortgage loan with this figured into your debt ratio before actually taking the loan out.