Getting down payment for home purchase from 401k

[Antonia]

Who has used funds froma 401k to put a down payment on a house? We are planning to use funds in the form of a 401k loan to purchase a new home.

Once we sell our current home - which is completely paid for - we will pay off the 401k loan.

My main question is did you get out more than you actually needed for the down payment? We are thinking about getting out a little more than we need and use the additional funds to do a little work to get our old house ready to sell. Then when we sell we'll just pay off the loan and be done.

We did not plan on buying a home or maybe we would have saved for a down payment. We have lived in the same house for 25 years. We are empty nesters and then a house we liked has come down in price about $40,000 due to the housing market and the current owners divorcing and really needing to sell. So we made an offer, they took it and we - two empty nesters with our first grandchild - are buying a house with a pool near the golf course!

 

[sbell111]

There is no way that I would do as you suggest.

 

[Antonia]

For what reason? The temporary loss of the investing power of the money taken out of the 401k for the down payment?

 

[Carly_Roach]

Who has used funds froma 401k to put a down payment on a house? We are planning to use funds in the form of a 401k loan to purchase a new home.

Once we sell our current home - which is completely paid for - we will pay off the 401k loan.

My main question is did you get out more than you actually needed for the down payment? We are thinking about getting out a little more than we need and use the additional funds to do a little work to get our old house ready to sell. Then when we sell we'll just pay off the loan and be done.

We did not plan on buying a home or maybe we would have saved for a down payment. We have lived in the same house for 25 years. We are empty nesters and then a house we liked has come down in price about $40,000 due to the housing market and the current owners divorcing and really needing to sell. So we made an offer, they took it and we - two empty nesters with our first grandchild - are buying a house with a pool near the golf course!

There is no way that I would do as you suggest.

I would do it. Especially if I knew the sale of my first house would more than pay back the 401(k). Just make sure you will realize enough from the first sale to pay back the 20% early withdrawal penalty.

Sounds exciting! Enjoy your new home and pool!

 

[jlewisinsyr]

NO WAY...if you lost your job, the loan must be paid off almost immediately, failing to do so results in your loan becoming a disbursement with the associated tax consequences as well.

Lets say your house takes a year to sell, sure you don't owe anything on that house, but meanwhile you still have to pay the loan on your 401k and you still have the risk of job loss, etc.

Two things you should avoid doing with a 401k, a loan or a withdrawal before retirement.

 

[Antonia]

We're doing it as a loan so we are not having to pay a penalty as if it were a withdrawal to purchase a home. And it is just for a down payment and a little more - not the whole cost of the new house.

I am all for doing it too. Especially since we have a paid for house to sell and we are moving to a nicer house in a better neighborhood and getting the new house at a steal.

 

[jlewisinsyr]

I would do it. Especially if I knew the sale of my first house would more than pay back the 401(k). Just make sure you will realize enough from the first sale to pay back the 20% early withdrawal penalty.

Sounds exciting! Enjoy your new home and pool!

Loans do not carry early withdrawal penalties, withdrawals do (permanent cash withdrawals). You cannot pay back a withdrawal with post tax money (or at all really), only loans.

A loan becomes a withdrawal if you terminate employement from the company which your 401k was based off of and fail to pay it back (usually in 60 days).

 

[Antonia]

I'm a registered nurse and my husband runs a water treatment plant. Both our jobs are pretty secure.

We are prepared to price our old house to SELLL!!!!!!

 

[jlewisinsyr]

I'm a registered nurse and my husband runs a water treatment plant. Both our jobs are pretty secure.

We are prepared to price our old house to SELLL!!!!!!

Never say never! Don't you have access to other cash, a savings account with enough money as emergency funds? If not, I'd focus on that versus buying a new house when my current house is already paid for.

 

[Carly_Roach]

Who has used funds froma 401k to put a down payment on a house? We are planning to use funds in the form of a 401k loan to purchase a new home.

Once we sell our current home - which is completely paid for - we will pay off the 401k loan.

My main question is did you get out more than you actually needed for the down payment? We are thinking about getting out a little more than we need and use the additional funds to do a little work to get our old house ready to sell. Then when we sell we'll just pay off the loan and be done.

We did not plan on buying a home or maybe we would have saved for a down payment. We have lived in the same house for 25 years. We are empty nesters and then a house we liked has come down in price about $40,000 due to the housing market and the current owners divorcing and really needing to sell. So we made an offer, they took it and we - two empty nesters with our first grandchild - are buying a house with a pool near the golf course!

Antonia, the best advice I can give you since we're not being inundated with people who've actually done this, is follow your own best sense. It sounds like you've already planned this out and just wanted to know if anyone borrowed more than the precise down payment amount.

I can tell you that my parents did this in the 1980's when they sold their old house (totally paid for) and bought a better one a few cities away. They borrowed against my Dad's 401(k), took just enough for the down payment, laid aside an extra amount for the penalty (I guess the laws have changed) and paid it all back when they sold their old house.

Hopefully someone who's actually done this will be along soon. No sense in getting advice from someone who hasn't been through it before.

Best of luck!

 

[jlewisinsyr]

Hopefully someone who's actually done this will be along soon. No sense in getting advice from someone who hasn't been through it before.

No, but you should listen to those who have knowledge of the transaction. There are no financial experts that would think that taking a loan in this method would be a good idea.

A better option since the other house is free and clear would be to take an equity loan against it (might delay the purchase of the other house) and then use the funds to buy the other house as the downpayment. That way, the loan can be paid off with the sale of the house and the risk is more appropriately tied to the event.

 

[Antonia]

Thanks Carly Roach! You hit the nail on the head. I have pretty much thought it out and I can't live in the fear of losing my job before I can pay back the loan or not selling my house for a year. I'm an optimist and I really think it's gonna be a fun thing for the two of us to start 2010 in a new house together after 26 years of marriage and 25 years in our old house!

 

[Carly_Roach]

No, but you should listen to those who have knowledge of the transaction. There are no financial experts that would think that taking a loan in this method would be a good idea.

Likely because those financial experts would rather you buy a loan from them at whatever interest rate than borrowing money from yourself. Of course they're going to try to scare you; they have a vested interest in you taking out a loan which puts money in their pockets.

Quick research has shown that Antonia seems to have done her homework.

http://rismedia.com/2008-08-18/home-sweet-loan-using-a-401k-loan-for-a-down-payment/

http://www.mmamortgage.com/401kforDownpayment

http://www.mtgprofessor.com/a - down payment/use_funds_in_401k_as_a_down_payment.htm

She's not likely to lose her job before the sale of her old house, she and her DH have discussed this, and it appears that they are making plans for the future rather than living in fear of what might happen. Good for her! Congratulations on the new house!

 

[jlewisinsyr]

Likely because those financial experts would rather you buy a loan from them at whatever interest rate than borrowing money from yourself. Of course they're going to try to scare you; they have a vested interest in you taking out a loan which puts money in their pockets.

Go ask your licensed and independent financial advisor (not linked to a bank) what they think (everyone should have one), trust me they will tell you exactly what I said, basically don't do it.

 

[jel0511]

I wouldn't do what you suggest. I understand the thought process though. What you should really do is get a HELOC on your current home and use that for the down payment. That way it gets closed when you sell your home The only problem with that scenario is if you've already listed your home a lot of banks won't give a HELOC when a house is listed. This way, you're protected your 401k .

 

[jlewisinsyr]

I wouldn't do what you suggest. I understand the thought process though. What you should really do is get a HELOC on your current home and use that for the down payment. That way it gets closed when you sell your home The only problem with that scenario is if you've already listed your home a lot of banks won't give a HELOC when a house is listed. This way, you're protected your 401k .

Exactly!

 

[Antonia]

Plus we qualify for a $6500 tax rebate since we have not purchased a home in the last 5 years.

 

[wdwfan16]

I would take out a loan against the paid off house for the downpayment and fixing up money.

If you did the 401K loan. What would you do if your house did not sell and you lost your job. The 401K loan is due at that time.

 

[MarkBarbieri]

We did something vaguely similar many years ago. We were building a house. I didn't pay enough attention to the structure of the building loan and we hit a month where we were going to have a serious cashflow crunch. My options were to sell some substantially appreciated assets and take a capital gains hit or borrow money from the 401K. We opted for the latter knowing that we could cover the loan if absolutely necessary. We only kept the loan about a month.

My advice is to look at your cashflow situation. Take out all of the money that you'll need because, I think, most 401Ks don't allow you to borrow more money until you've paid back the original loan. With that being said, spend as little of the 401K money as possible because you want to pay it off as quickly as possible.

The other concern that jumps to my mind is whether you have sufficient emergency savings. If you don't have non-retirement savings equal to at least 6 months of your expenses, you might want to focus on boosting your emergency savings. That has nothing to do with the 401K loan situation. I just get concerned when I hear people tapping illiquid investments to cover short term needs. That was our situation and we rectified it for the long term by keeping a larger share of our non-retirement savings in less volatile and illiquid investments.

 

[clutter]

I'm fiscally conservative, and I'm considering doing the same thing.

The determining factor is going to be the interest rate on the 401k loan v. a home equity line. Like you, my job is secure and I plan to price my house to sell quickly. My house to sell is in a neighborhood that, even in this market, tends to sell quickly. It's a lower-priced neighborhood that goes to very desirable schools. The last house listed sold before the listing his the mls. However, I want to move out (especially move out my 2 dogs) before I do the last step: replace floor and sell.