Let’s talk about first time home buyer 401k withdrawal, Let’s take a closer look at this and before we get into this too much I want you to know something upfront I’m a trusted real estate adviser and not alone Oscar Ahora financial advisor if you have any specific questions about your own unique circumstance please reach out to a local loan officer or your financial advisor to review these options with you this is educational and I hope it gives you another talking point to figure out how to buy your home.
What is a 401k?
The first thing is what is a 401k now if you have a 401k you may be familiar with what it is or what your company has one whether they have a match and if. So how much are they matching for every contribution that you made right so it operates as a retirement account it’s something that you pay into overtime with the idea that you will grow this account and it’ll be there for you in your golden years so when it comes to looking at borrowing money against the 401k it’s like really you’re borrowing money from your future self with the money that you would have for retirement.
So that’s kind of interesting if you think so ask your future self which you lend to you now to buy a house if you feed yourself says yeah I’m going to you to help you buy a house. It’s gonna be good for us in the future then you’re in good hands and both of you have made a decision both your present-day self and your future day sell.
Your 401k has a really interesting tax provision for it so that you can use the money to purchase a home with an ability to repay it over time.
Now, this is unlike an early withdrawal of your 401k but it generally starts off with about 10 percent of the amount that you’re drawing so it’s important to note the differences between using your 401k to help you buy a home and what the impacts, in reality, are to you when you use it for an early withdrawal purpose.
So does that mean that you don’t have to repay absolutely not in fact if you don’t repay back the amount that you use for your down payment or your buyer closing cost to help you buy a home you can be assessed with the penalty tax so be sure to have this conversation with your financial advisor your company or the person on your 401k to set up a repayment plan is you’re gonna greet you and that you can move to go forward to avoid that penalty tax?
Remember how we were talking about a mo ago this is really kind of like taking a loan from your future self so with every loan we know that there’s a well an interest rate. So guess what that interest gets a flight to as you’re repaying back your loan it actually gets repaid back to your future self for loaning you that money now.
So your future self could be saying (hey thank you so much not all you’re making great steps in buying a house paying into a 401 K but you’re also paying me some interest on that money that I loaned you back 20 30 years ago thank you so much for that and you’re gonna enjoy it today) of course you may have heard of something called a hardship withdrawal.
So what exactly is that and how does it work well you would neither have that conversation with the administrator of your 401 K to see if you could use it for buying a house and a lot of cases you could if it’s a hardship withdrawal but you want to be clear on how that works so now to get down to the nitty-gritty about
How much you can borrow from your 401k first time
As of the date of making this article, you can borrow up to $50,000 from your 401k and if your account is under $10,000 you can borrow up to the ten thousand dollars of funds that are in that account to help you buy a home.
First pros Borrowing from 401k: One of the biggest pros up front is if you have the money in your 401k and it’s gonna give you the ability to make a 20% down payment or greater on the purchase of your new home then you’re not gonna have what’s called private mortgage insurance on that loan. That’s gonna save you hundreds of dollars if not thousands of dollars over the course of the year depending on the price of the home that you purchased.
Second Pro is that you’ll have the ability to buy a home quicker by using money that yours anyways.
Third Pro is perhaps one of the coolest ones and that’s the fact that your 401k is getting repaid with interest but you only set you up for better success in the future when you do hit those golden years.
Fourth Pro is that you won’t incur any tax penalties so long as you have made a promise to repay the 401k again you have to make the promise to repay the 401k to avoid any tax penalties be sure to ask your financial adviser or whoever is managing your 401k with you to explore your options and better understand how the same patching a local loan officer that you review your mortgage options with would also be able to provide you with some really good guidance on this.
When Using your 401k
So when is it a good idea to use a 401k to buy our house because let’s face it a lot of financial advisors would probably tell you it’s not exactly the best idea that borrows from your retirement accounts to purchase a home or for any other purpose.
Leave it there so it’s there for you in the future and that’s sage wisdom and that sage advice at the same time there are some great reasons why you might want to do this the first one is avoiding the private mortgage insurance or a mortgage insurance premium if you’re using an FHA loan tool.
This becomes critically important to understand and it’s a great conversation that has with your local owners about the differences between a PMI which is private mortgage insurance and a mortgage insurance premium which is a MIP they kind of sound the same they kind of act the same but the realities of them are quite different.
All that said it’s a really good idea if you have an avenue to use your 401k to avoid a PMI or a MIP again get with a local loan ah. So I have that conversation to see how it pertains to you today.
The second time it’s a good idea is if you’re looking at becoming a first time homeowner if you really start thinking about how much money is being flushed down the toilet every single month with money you will never see again in the form of this thing called rent it’s enough to make your stomach turn and get sick I mean let’s be honest it really is right so if you think about the fact that if you were applying that same money for your housing expense going from rent to homeownership then you’re actually paying into your future again by paying down the mortgage balance paying down the interest on that property and statistically we know that real estate appreciates up roughly 3% annually according to the 100 year average.
So in short what’s that doing for you your home is now another retirement vehicle appreciating over time this is when it can also be a good idea to consider your options wisely and make the best and most well-informed decision that’s right for you.
The third time. It’s a good idea is if you know for a fact that you can pay back that balance within the next 12 months doing so will help you avoid any tax penalties and it’ll also go ahead and get your 401k account back to where it should be of course with any pro is a con.
First Con: So let’s look at some of the cons of using your 401k to buy a house to help you make a balanced decision so when it comes time to look at the total monthly budget of buying your home and repaying the balance due to your 401k it results in a higher monthly budget amount until your 401k is brought back to the level that it should be per your a promise to pay the 401k.
The second con is that you may not be able to contribute to your 401k until the balance has been brought back to its previous level. If you want to make sure that you have that conversation with an administrator of your 401k to see if you can still make contributions while you’re repaying.
It understanding whether you’re going to be able to continue making contributions while you’re repaying it or not is important for you to know for planning your retirement in the future.
The third con here is that your employer may say hey you know what I’m really happy that you bought your new home I understand the reasons why you use your 401k is sounded like a great deal but here’s the thing until you repay the 401k I’m not going to match your contribution and tell it’s been repaid in full.
Now if you have a 401k set up through a company and you leave that company to guess what’s gonna happen as opposed to having maybe twelve months to repay it’s gonna have to be repaid inside of 60 days. So consider your options wisely and how long you really choose to work with that employer and if your 401k will transfer with you from employer to employer by understanding both the pros and the cons help you make the most well-informed decision possible.
When borrowing your 401k
With that let’s discuss some of the reasons why borrowing from your 401k could be a bad idea. It can become a bad idea if it hurts you long-term retirement prospects for the what’s you’re putting into your account you need to understand the trade-offs and make sure that you have the ability to promise to repay the money before deciding to move forward on this understand the consequence and understand the benefits at the same time.
It can be a bad idea if you don’t fully comprehend the tax penalties associated with it as we discussed early in this conversation we know that there could be up to ten percent of a tax penalty when you withdraw from a retirement account we also know that with a 401k when you’re using it if you’ve made a promise to repay the note and you are making payments on it then that tax penalty can be waived.
At the same time, we also know that if you leave your current employer than within 60 days the expectation is that they will be made whole with the money that you took out from your 401k I understand and weigh the pros and cons to make sure you’re making the best and most well-informed decision for you.
Okay so now that you have a better idea of what it is to use your 401k to buy a house and hope you have enough information to make a great decision that’s going to be best for you and yours moving forward.
Low and No downpayment
Now let’s talk about the realities of different loan products that are out there let’s quickly go over them with the low and no down mortgage program options.
If you’re looking for an FHA loan a traditional FHA loan is 3.5% down it’s one of the reasons why an FHA loan is one of the most popular loan options out there because of their low down payment on their traditional project and also the ability that have what are called downpayment assistance programs.
I would like to point out here with you to review the details of any down payment assistance program regardless of the low tide with its FHA, VA, USDA or conventional with your local loan officer understand the trade-offs with down payment assistance programs a lot of cases not every case but a lot of cases.
Because with a higher interest rate for your mortgage if you’re wondering why that is it’s because that’s how that program pays for those low and no down payment options moving forward.
The next loan that you might want to consider is a VA loan if your active duty or you have served honorably in the United States military then the VA loan is likely to open to you with a VA loan it is a zero down loan now that’s a really cool thing for more information about that talk to your local loan officer and see how that’s gonna work for you again that’s only available for active duty and veterans that have served honorably in the United States military but not to be outdone conventional loans have now swooped in and said hey we want to get into this low down payments to help people buy a home.
We have loan products that are available to you from 3% down and we also offer some downpayment assistance programs so with all this great information to choose whether you use our 401k a low downpayment or a no down payment plan the question becomes what’s the best next step for you my suggestion simply pick up the phone and talk to a local loan officer today every viewed your financial options with them for your mortgage needs.