Question

Update: Her company/401k doesn't allow loans. So we contacted a lender to see how much we get approved for and instead of conventional we will do a FHA loan I guess. Will see what he says. Thanks for all the advice! Has anyone here pulled from 401K for down payment on house? Trying to find out how easy the process is, and what the process is. Backstory: My mom moved into our home last May and we have decided it's best to have her continue living with us. So we are looking at selling our home and purchasing a larger one with a mother in law suite basement. In order to buy a larger home in our area it will cost around $300k-$340, 000. Our home will sell for about $250k and after paying 6% in agent fees we should walk out with around $50, 000. We would need/want more than $50, 000 down on a $300k+ house so the plan is for my husband to get on a loan with my mother (she still works and makes about 55k per year) and since it will be her primary home she wants to pull out around 20-30k to put towards the down payment (shes over 55 so will only pay taxes and no fees). Im just not sure how this entire process will work or how easy it is to do. We could not afford it without her portion of the down payment. Once in the house we will split the mortgage so it'll actually save us in the long run hundreds of dollars per month. I just hope they approve our plan  

Answer 1

I'm sure this is not what you want to hear, but I would not touch the 401k. My mom did and now at the age of 62 and with a brittle body she is having to go back to work. She had planned to work until she was 70 so it wasn't a big deal to her to cash out her 401k. then she had an accident and broke her back and was made disabled. She can't live off her early SSI so she is forced to go back to work. I'm just giving another perspective as sometimes unexpected things come up.  

Comments

@attired Totally understand. My mom is only 55 and very healthy. The reason we are investing in a home together is so that when she is older I will be able to take care of her financially. Our mortgage will be so cheap split that she will very quickly be able to pay back what she borrowed and max out contributions.  

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@diella are you an only child? I ask just bc you should speak to an accountant. Come time when mom needs care, and maybe more than you can manage, she will have her name on a house- which they will take and/or expect money from to give her the car or possible placement. Long term she and you might be better off if she doesn’t have her name on the house. She can make two large payments on your mortgage and pay the home taxes. Look into this carefully.  

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@agog0 I have 1 sibling but my grandmother purchased a home for her in cash $220, 000 so my sibling would never come after me for anything when my mom dies. I will look into maybe getting her name off the deed as she ages though. Good things to consider. Thank you.  

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@diella @agog0 has brought up some great points. Working in healthcare, I see people of all ages rocked by the diagnosis of cancer. I can't begin to tell you how it drastically changes people's lives. I get that right now your mom is healthy but reality is, that can change at any point. If something major should happen, Medicaid does a 7 year look back. Having your mom on the mortgage could negatively impact any help should could qualify for if something were to happen. If your mom should end here employment for any reason, the loan would have to be repaid immediately.  

Answer 2

Actually your mother would pay both federal and state income tax along with a penalty of 10%. The penalties don’t go away until 59 1/2. She could get a waiver on up to 10k for a home purchase. The act of the withdrawal should be pretty simple, just calling HR or her plan administrator, but you should probably speak to a tax accountant along with an estate planning attorney to confirm what that withdrawal will cost her at tax time and to ensure all the home titling etc is done correctly. Especially if you have siblings or any other heirs that could potentially come after the asset.  

Comments

@thales I was under the assumption that after 55 there are ni penalties, only taxes if done as a hardship? I guess I need to look into this. She really has no choice though because she needs a place to live and wether it was with me or not she had planned on borrowing from 401k for a down payment.  

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@diella a home purchase isn’t considered a hardship. They do allow 10k penalty free for a home purchase but that may be first time homebuyer, so definitely suggest an accountant for definitive answers.  

Answer 3

You can take up to $10, 000 out of your IRA penalty-free for a first-time home purchase. But you still have to pay the taxes on the distribution

Answer 4

I took a loan out for my down payment on my house. They took about $45 more out of each paycheck to pay it back. As I got close to closing, I found out that I needed more money. I took out a “hardship withdrawal” home buying is one of the qualifications. I just had to send them a copy of my Accepted offer. I did pay taxes on that withdrawal and also owed the IRS a tad more when I filed.  

Comments

@salvatore Do you know how much you are allowed to take as a hardship?  

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@diella it’s different for everyone based on how much you have in there. Who is your account holder? Mine was fidelity. I was able click a box that said explore loans and withdrawal and it told me how much I could take from each option.  

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Oh and fidelity is super fast. Once they approved my offer docs I had the check in 3 days. I sent my lender the withdrawal records and copies of the check.  

Answer 5

@thales is correct. Loans/withdrawals may also be able to be done online, and the down payment can be gifted to you (or considered yours if it's in your account for at least 90 days. ) The other option would be to list your home yourself and save those fees. FSBO is a great website; you could also market on local Facebook sites. Or, maybe, as an entirely alternative plan, build/remodel a suite in your existing house (if the space otherwise works). This could probably be done for far less than 50K depending on your existing blueprint. A great contractor could tell you more.  

Comments

@carminecarmita my sister is adding an addition for my mom.  

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@thales I think it's a really great alternative to buying a home with an in-law suite. Plus, you can potentially build in tax write-offs. And, you (usually) already have equity in the home!  

Answer 6

I took a $11, 500 primary residence loan in December from my 401k. process was easy no penalties . its a loan from my own money that I pay myself back with interest and its automatically taken from my paycheck every week. I would've chosen not to so this but at the time I had no choice. I plan on paying it back in full this year

Comments

@flay7 what was the interest rate if you dont mind me asking?  

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@diella 5%

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Repayment plan is 30 years so they take 20 out of my check. but like I said I will have it paid in full this year

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@flay7 thank you

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@diella your welcome

Answer 7

Just. Say. No. Worst idea ever. Save up. Have her contribute how she can (groceries and utilities). Things will Be tight for awhile but that’s ok.  

Answer 8

We did! But almost resulted in us owing bc you can only use 10k for a first time home purchase and I withdrew more. But bc I had business expenses for my side hustle it balanced out. However, I’m used to getting a 5-8k refund so I feel like I’m paying for it now but not in a bad way.  

Answer 9

A loan is paid back with no penalty or taxes. the interest is paid back to you. that’s the best way to use your 401k you can typically pay it back over 60 months. it’s a very easy process if she decides to do a withdrawal from her 401k that too is easy just paperwork but you’ll need to be sure she pays the taxes due on her 2020 return. being she is only 55 she is held to all penalties until she turns 59 1/2

Comments

@mambo it’s really not advisable to take a loan from your 401k. Yes you pay yourself interest, but your money is not growing and compounding for yourself future. If she loses her job they may require immediate payoff or report it as a withdrawal with applicable taxes and penalties. Lastly, the money you pay back is with after tax dollars (from your net pay). When you have to withdraw in the future it gets taxed again.  

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@thales it’s better than a withdrawal and there are no penalties unless you lose your job. I am aware of all that. it is better than a line of credit or a loan when you run into a pinch. it is best if yourself pay back ASAP. my interest rate with my 401k is less than 5% back to me. since you already put the money in tax deferred paying it back is not as big of a penalty as it would be to pay all the taxes up front along with disbursement penalties.  

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Not only is your money no longer growing but your bills have just gotten bigger and your take home pay has gotten smaller. It might make it harder to make your new mortgage payment.  

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@thales actually it is advisable by many financial advisers but there are also certain things to consider before doing so. When we bought our house, we are in our 30's and my 401k fund had a very good amount of money in it and we spoke with several people and they all advise for our situation it was a great option.  

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@dryasdust you pay yourself back internet on what you borrowed when you take a loan.  

Answer 10

I do not think it’s a good idea to get your finances so mixed up with your mother’s. Find a place you can afford and allow your mother to pay rent if she will live with you. If she wants to pay toward the house initially, that money should be a gift with no strings attached. No matter how much you want to do this, I would be very cautious. And not because you don’t love and trust your mother. But because your finances should stay independent of each other. This would create a situation that could damage your relationship in the long run.  

Comments

@belch69 yes there are many legal, Financial and tax ramifications to consider.  

Answer 11

My concern would be if she passed away can you afford it on your own.  

Answer 12

Personally, I would only move somewhere where you can do it on your own and not have to rely on that chunk of money as a down payment. Although in theory, it sounds like a great idea, it won’t be. Being in the financial industry, I would not recommend touching the 401k because of the taxes and penalties she will have to pay. I’m not sure what state you are in, but in CA, state and fed will average about 20-25% needing to be withheld. And she will be penalized on top of that because she is not of retirement age. That’s a lot of money to loose. If she takes out a loan, she’s going to have to check on a few things: 1) up to how much can she withdraw as a loan? 2) what will the payments be each pay period to repay the loan? 3) can she withdraw for a home purchase that isn’t hers (it won’t be in her name)? Also, there are so many more thousands of dollars more than just the realtor costs- make sure you’re prepared for that. I like where you’re going with the idea, but I personally would not rely on anyone else’s money to purchase the home. Too many things can go wrong and put you and your little family at risk. May I ask you this. can you put down 10%? I know a lot of people shoot for 20% down payment, but 10% may give you the flexibility for you and your husband to do it on your own. Then perhaps your mom can pay extra per month, which would have been part of her down payment anyway, and you apply the extra as principal only payment? For example, she would normally pay you $300, but now pays $600? Take the $300 extra and make an additional payment. And when you say the plan is for your husband to get on a loan with your mother. did you mean the two of them would be on the home loan? Or the 401k loan? Again, I wouldn’t have the two of them on the home loan. Who would reap the benefits when it comes time to file taxes because your mom and husband don’t file jointly. Then this would turn into more of a business venture and can get very messy. I would proceed with seeing what you and your husband can qualify for on your own. you’d be surprised how many loan programs are out there. It’s not cookie cutter like most think. The difference of her $30kish down payment would only be about $150/month when it comes to your mortgage payment.  

Comments

@hertzog We bought our new home for $227k and put about $50, 000 down 2 years ago and my husband would not be able to get more than that with just his pay. Unfortunately the homes around here with daylight basements are closer to $300k+. So we wouldn't be able to do it alone. But we would be able to afford the mortgage payment by ourself if anything ever happened to her. Her name would be on the house, at least for now. When she gets really old we may take her off just so nobody can come after the house as mentioned in a previous comment.  

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@diella Can your mom take the loan out, “gift” the money to your husband, then he stays on the loan by himself? Please don’t let her withdraw it from her 401k! Every time someone touches it that’s not of retirement age, I see so many bad things happen. Every. Single. Time. Make sure she only reviews her loan options! If I were you, here’s the steps I would take: 1. Call bank and get preapproved. Ask what the maximum loan amount they will give your husband is and what down payment options you have. When we did this (buy/sell), we had a few options in our hands. At this point, pretend your mom isn’t an option for the loan/down payment. 2. Once you get that info, review it to see what you need from her. Ex: maybe you only need 20k, 10k or nothing! 3. If you do need her at this point (now you know for certain from a banks perspective), she can call her employer to see what 401k loan options are, then go from there. But please keep this in mind. at any time, anything can go wrong. Let’s say she gifted you $30k to get the house, then for some reason (even though we all don’t want to think this would ever happen) she wants her $30k back. she’s unhappy at the house, you and hubby are fighting because she’s there and not pulling her weight, god forbid something happens and you loose the house (work injury, illness, bad housing market, divorce), how will you get the money back to her? Does she loose it? Also, remind her that she cannot have 2 loans out at the same time from her 401k so until it’s paid off in full, she cannot borrow again. Does hubby have a 401k he can borrow from? Just trying to think of any idea for you all to not have to financially rely on her in anyway.  

Answer 13

We did this as a withdrawal for primary residence. There were some tax ramifications that I wish I had been more educated on but at the end of the day we do not regret our decision. I’m with the others on just be careful mixing finances with family. It all starts out good but money is one of the quickest things to ruin a relationship.  

Answer 14

This is just a bad idea!  

Answer 15

Not a good idea. You have to pay both taxes and a penalty on what you take out. And if you lose your job, the balance becomes due

Answer 16

Definitely not. If a person has to borrow from their retirement to get a bigger house then they can’t afford the house in my opinion. Your Mom should independently speak with a reputable financial counselor before going forward.  

Comments

@wardlaw She would need to borrow from her retirement to get her own house even of she didnt keep living with us. She came out of a 20 year relationship and has no savings for a house. She has been living with us in a 4 bedroom house with my husband and I and 4 kids. We can't stay here because we are busting at the seams. I want to help her financially by buying a bigger house so she has her own space and can split a mortgage with us. We will focus on getting the mortgage paid off in full very quickly. We will be debt free in less than a year and will throw everything at mortgage after we max out retirement. Hopefully not having a mortgage will be ok for future medical expenses on her we can just take her of the deed? That way they cant come after the house for medical purposes. All good points and things i will need to research.  

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@diella good luck!  

Answer 17

Just know that if you take a loan out from your 401k. and for some reason get fired from your job or quit. the balance is due. To risky. and think of it this way. you are taking money from your future self.  

Comments

@duet535 that’s not always true we just got a 1099 for ours when we did it a few years ago.  

Answer 18

@diella Mace did you guys?  

Answer 19

Is there a way to stay in the old house. Build a freestanding garage with a studio apartment above? Or check out the in-law building kits. If you go ahead with your plan, is your name going to be on the deed?  

Answer 20

It is easy to pull from your 401k, however you would have to make sure that the 401k allows you to pull for a purchase of a home, and then I believe each company only allows a certain amount- you would have to contact the 401k administrator and check if you can pull, the amount you can, and the cost

Answer 21

Mmmm. no

Answer 22

We did for our current house and it was a great choice for us. You need to talk with the company that handles your 401k and find out how much you can borrow. Every plan is different. We were able to borrow the money for a 10 year loan since this is our permanent residence. There is an interest rate on the loan amount. Each paycheck my HR department takes money from my check and applies it to the payments with the interest rate. The interest rate helps to make you money while the money is out of your fund. We dont really miss the money since it comes straight out of my check with the other deductions like my normal 401k contribution and medical plan costs.  

Comments

@kayser7 this was the same for me. Glad I did it, paid the 401k back and had more than I started with.