If you’re getting ready to buy a home and eyeing your 401(k) for help with the down payment, you’re not alone, but before tapping into your retirement savings, it’s important to understand how it works and what the potential impact could be.

Yes, your 401(k) can be used toward your down payment, but there are two primary ways to do it: a 401(k) loan or a hardship withdrawal. Each comes with its own pros, cons, and long-term considerations.

Option 1: 401(k) Loan

A 401(k) loan lets you borrow against your retirement savings and repay yourself over time with interest. One of the advantages? Mortgage lenders don’t include 401(k) loan payments in your debt-to-income (DTI) ratio because you’re technically borrowing your own money.

But even though it doesn’t impact your DTI, it does affect your monthly budget. You’ll still be responsible for making payments, which can limit how much house you can realistically afford.

Pros:

• Doesn’t count against your DTI
• No credit check required
• You’re paying interest to yourself

Cons:

• Reduces your retirement savings
• Monthly repayment affects your cash flow
• If you leave your job, the loan could become due in full

Option 2: Hardship Withdrawal

Some retirement plans allow for a one-time hardship withdrawal if you’re buying a primary residence. This isn’t a loan, so there are no repayments, but you may owe taxes and possibly early withdrawal penalties, depending on your age and plan rules.

Pros:

• No repayment required
• Can provide immediate access to funds

Cons:

• May be taxed as income
• Could come with a 10% early withdrawal penalty
• Permanently reduces retirement savings

So, Which Option Is Better?

Using retirement funds to buy a home can be a strategic move in certain cases, but it’s not one-size-fits-all. The right approach depends on your financial goals, budget, and timeline.

Before you make a decision, it’s smart to check with your 401(k) provider and talk through your homebuying strategy with a mortgage expert.

If you’re considering using your 401(k) for your down payment and want help evaluating your options, reach out to Liberty Star Mortgage in Fulshear, Texas. Let’s make a plan that keeps both your homeownership goals and long-term finances in mind.