Updated September 2026

How to finance a home purchase with a 401(k): loans, withdrawals, and smarter alternatives

Q: Is it better to take a 401(k) loan or withdrawal to buy a house?

A loan is almost always cheaper. You avoid the 10% early withdrawal penalty and income taxes, and your payments, including interest, go back into your own account. The main risks are lost market growth while funds are out and the possibility that leaving your job accelerates the repayment deadline. A withdrawal permanently shrinks your retirement savings and triggers taxes.

Couple reviewing retirement savings at a kitchen table while deciding how to finance a home purchase with a 401(k)

You can finance a home purchase with a 401(k) two ways, and they cost wildly different amounts. A 401(k) loan lets your plan lend you the lesser of $50,000 or 50% of your vested balance, with no income tax and no penalty as long as you repay on schedule. Generally within five years, though a plan may allow longer when the loan buys your principal residence. A withdrawal before age 59½ is the expensive door: ordinary income tax plus a 10% additional tax, with no first-time homebuyer exception for 401(k) plans.

That exception exists only for IRAs, and only up to $10,000 in a lifetime. For most buyers the loan is the cheaper route, and a low-down-payment mortgage is frequently cheaper than either.

Learn how to finance a home purchase with a 401(k), including how the borrowing limits and repayment rules work, what a withdrawal costs after taxes and withholding, and which 3%-down and zero-down programs may let you leave your retirement account alone. If you’re early in the process, start with our Home Buying guide.

Key takeaways:

The loan is capped twice: A 401(k) loan is limited to the lesser of $50,000 or 50% of your vested balance, and it triggers no tax and no penalty as long as you repay in substantially equal payments at least quarterly.
A withdrawal costs about a third of itself: An early distribution from a traditional 401(k) before age 59½ generally means income tax plus a 10% additional tax, and your plan must withhold 20% up front on most lump sums.
Most buyers have a cheaper path: HomeReady and Home Possible allow 3% down, FHA goes as low as 3.5%, VA and USDA need zero down for eligible buyers, and Michigan’s MI 10K DPA adds up to $10,000.

How does a 401(k) loan for a home purchase work?

A 401(k) loan is money your plan lends you out of your own balance, capped by the IRS at the lesser of $50,000 or the greater of $10,000 or 50% of your vested account balance. It isn’t a distribution, so nothing is taxed and no penalty applies, provided you follow the repayment rules. Plans aren’t required to offer loans at all, so the first call is your plan administrator, not your loan officer.

How much can you borrow, and how fast must you repay it?

Run the limit against your vested balance. On a $90,000 balance, half is $45,000, under the $50,000 ceiling, so $45,000 is your maximum, and any loans already outstanding count against it.

Repayment must happen within five years in substantially equal payments of principal and interest, made at least quarterly. The exception matters here: a loan used to buy your principal residence may be repaid over a longer period if the plan permits, which is why some employers allow a 10- or 15-year schedule. Ask for your plan’s home-loan term before you assume you have it.

What a 401(k) loan actually costs you

The interest goes back into your own account, not to a bank, but the loan isn’t free. Repayments come out of take-home pay with after-tax dollars, they don’t count as contributions, and some plans suspend contributions, and your employer match, while a loan is outstanding.

Here’s the math. On a $280,000 home in Waterford with 5% down, that’s $14,000 down plus closing costs, which Freddie Mac puts at 2% – 5% of the purchase price, or $5,600 – $14,000 here. Call it $28,000 of cash to close at the high end. A $28,000 loan against that $90,000 vested balance sits under the $45,000 limit, costs no tax and no penalty, and gets repaid to yourself.¹ If you’d rather not borrow, our guide to how to save for a down payment maps the timeline for getting there in cash.

What happens if you leave your job

This is the risk people underestimate. If the loan isn’t repaid according to its terms, the unpaid balance becomes a plan distribution, taxable income, plus the 10% additional tax if you’re under 59½. Your plan may require full repayment when you leave.

Federal law softened this. When a loan in good standing is offset solely because you left the employer or the plan terminated, it’s a qualified plan loan offset, and you can roll that amount into an IRA or another eligible plan as late as your tax return due date for that year, including extensions, not the usual 60 days. That only helps if you have cash to replace the balance.

What happens if you withdraw from a 401(k) to buy a house?

An early withdrawal costs roughly a third of the money before it reaches your closing table. The taxable portion is added to your ordinary income, the IRS adds a 10% additional tax on that amount, and your plan must withhold 20% for federal income tax on most taxable lump sums paid directly to you.

Work it through. Take $30,000 out of a traditional 401(k) at age 45 and $6,000 is withheld before the money lands. At a 22% federal marginal rate you owe $6,600 in income tax and a $3,000 early distribution tax about $9,600 of the $30,000 gone. To actually net $30,000 for a down payment, you’d need to withdraw roughly $44,100.² Have a tax professional price your bracket before you file the paperwork.

Buying a home is a permitted hardship reason, costs directly related to buying your principal residence are a recognized immediate and heavy financial need, but a hardship distribution is still taxable, still exposed to the 10% additional tax, and can’t be repaid to the plan or rolled over later. And the first-time homebuyer exception to that 10% tax applies to IRAs only, capped at $10,000 for your lifetime. It does not exist for 401(k) plans.

Traditional vs. Roth 401(k) withdrawals

A Roth 401(k) is better here, but not as forgiving as people expect. It does not follow the Roth IRA ordering rules that let you pull contributions out first. A nonqualified distribution from a designated Roth account comes out pro rata: the basis portion isn’t taxed, but the earnings portion is included in gross income and can carry the 10% additional tax.

The IRS example makes it concrete: a $5,000 nonqualified distribution from an account holding $9,400 of Roth contributions and $600 of earnings is $4,700 of untaxed basis and $300 of taxable earnings.

401(k) loan vs. withdrawal: which one costs less?

The loan wins on cost in nearly every scenario. A withdrawal only makes sense when your plan bars loans, when you need more than the limit allows, or when you’re past 59½.

Feature	401(k) loan	Early withdrawal (under 59½)
Maximum amount	Lesser of $50,000 or the greater of $10,000 or 50% of your vested balance	Whatever your plan permits to be distributed
Income tax	None if repaid on schedule	Ordinary income tax on the taxable amount
10% additional tax	None if repaid on schedule	Applies; no first-time homebuyer exception for 401(k) plans
Upfront withholding	None	20% mandatory federal withholding on most lump sums paid to you
Repayment	Substantially equal payments at least quarterly, generally within 5 years; longer for a principal residence	None; a hardship distribution can’t be repaid or rolled over
Effect on retirement savings	Temporary; principal and interest return to your account	Permanent; the money and its future growth are gone
Effect on your mortgage file	Payment generally excluded from DTI when the account secures the loan	Shrinks documented assets and reserves

What your lender needs to see when you use retirement funds

Retirement money is an acceptable source of cash to close, with conditions. Fannie Mae accepts vested funds in 401(k), IRA, SEP, and Keogh accounts for down payment, closing costs, and reserves, but the lender must verify you own the account, that it’s vested, and that it allows withdrawals regardless of your current employment status. If your plan only releases money at termination or retirement, those funds don’t count.

Proof of receipt: When retirement funds go toward down payment or closing costs, expect to document the withdrawal and show the money landing in your account.
Your loan payment usually won’t hurt your DTI: A payment on a loan secured by a financial asset generally doesn’t have to be counted in your recurring debt, as long as the lender gets the loan instrument showing the account as collateral, a real advantage over borrowing the same money unsecured.
Reserves get reduced, though: If you’re using that same account for reserves, the lender must subtract the loan proceeds and related fees from the asset’s value first.
Timing matters: Plan loans take days or weeks. Start before you’re under contract, not after.

The same sourcing logic applies to money from relatives, which is why financing a home purchase with gift funds pairs with this one: on a one-unit principal residence, Fannie Mae requires no minimum contribution from your own funds, so a gift can cover the whole down payment.

Alternatives that may beat tapping your 401(k)

Before you touch retirement money, price the programs that need 3% or less. Because Align Lending is a broker, we place conventional, FHA, VA, USDA, and MSHDA loans through partner lenders. Five paths that don’t require draining an account. Start with our overview of buying a home with a low down payment.

3% down conventional: Fannie Mae’s HomeReady 3% down program and Freddie Mac’s Home Possible both allow a maximum 97% LTV with qualifying income limited to 80% of area median income. Private mortgage insurance applies, but you can request cancellation at 80% of the home’s original value, and the servicer must terminate it automatically at 78%.
FHA at 3.5% down: HUD allows a down payment as low as 3.5% of the purchase price. Maximum FHA-insured financing of 96.5% LTV goes to borrowers with a decision credit score of 580 or above; scores of 500 – 579 are limited to 90% LTV.³
Zero down for VA and USDA: A VA-backed purchase loan requires no down payment as long as the sales price isn’t higher than the appraised value, and carries no PMI or MIP. A VA funding fee applies instead.⁴ USDA’s Single Family Housing Guaranteed Loan Program offers 100% financing in eligible rural areas at or below 115% of area median income.
The IRA exception: If you hold an IRA too, a qualified first-time homebuyer distribution of up to $10,000 lifetime is exempt from the 10% additional tax. Income tax on a traditional IRA distribution still applies, and the exception doesn’t extend to your 401(k).
Gift funds and assistance: A gift from an acceptable donor can fund the entire down payment on a one-unit principal residence, and assistance programs stack on top. See first-time home buyer grants and programs.

The CFPB resources on preparing to buy a home show how to compare these programs on a Loan Estimate rather than a headline down payment number, where the real cost difference shows up.

What Michigan buyers should know

A 401(k) withdrawal costs Michigan residents more than the federal math suggests, and the state’s assistance programs often make it unnecessary.

State income tax stacks on top: Michigan’s individual income tax rate is 4.25% for the 2026 tax year. On a $30,000 early withdrawal that’s roughly $1,275 more, layered onto the federal income tax and the 10% additional tax, pushing the total past a third of the money.
MI 10K DPA covers up to $10,000: Michigan’s down payment assistance loan provides up to $10,000 toward down payment, closing costs, and prepaids as a 0% non-amortizing second mortgage with no monthly payment, repaid when you sell or transfer the home. It pairs with a MSHDA MI Home Loan first mortgage, requires a homebuyer education class, and caps liquid cash assets at $20,000.
MI Home Loan basics: The MSHDA MI Home Loan requires a 640 minimum credit score and is open to first-time buyers statewide and repeat buyers in targeted areas, with a statewide sales price cap and county income limits MSHDA updates periodically.
First-generation buyers get more: MSHDA’s First-Generation Down Payment Assistance program offers up to $25,000 for buyers whose parents haven’t owned a home. Confirm current terms on the MSHDA down payment assistance programs for Michigan buyers page.

Stack $10,000 of DPA on a 3%-down conventional loan and the arithmetic changes fast: 3% of a $224,500 purchase is $6,735, so the assistance covers the entire down payment with roughly $3,265 left over for closing costs.

FAQ: Using a 401(k) to buy a house

Here are answers to common questions about using a 401(k) to buy a house.

Can I use my 401(k) to buy a house without penalty?

Yes, through a 401(k) loan. If your plan allows loans, you can borrow up to 50% of your vested balance, capped at $50,000, with no early withdrawal penalty and no income tax, as long as you repay on schedule. A direct withdrawal, by contrast, usually triggers a 10% additional tax plus income taxes if you are under 59½. Our guide to alternative financing options for home buyers covers the other routes worth pricing first.

How much can I borrow from my 401(k) for a home purchase?

IRS rules cap 401(k) loans at the lesser of $50,000 or 50% of your vested account balance. Repayment is typically required within five years, but many plans allow a longer payback period when the loan funds the purchase of your primary residence. Check your specific plan, since employers can set stricter terms or prohibit loans entirely. Our preparing to buy hub covers how much cash you actually need at closing.

Is it better to take a 401(k) loan or withdrawal to buy a house?

A loan is almost always cheaper. You avoid the 10% additional tax and income taxes, and your payments, including interest, go back into your own account. The main risks are lost market growth while the funds are out and the possibility that leaving your job accelerates the repayment deadline. A withdrawal permanently shrinks your retirement savings and triggers taxes. Compare both against a low-down-payment mortgage before deciding.

What are alternatives to using a 401(k) for a down payment?

Many buyers can skip the 401(k) entirely. Conventional programs like HomeReady and Home Possible allow just 3% down, FHA loans go as low as 3.5%, and VA and USDA loans need zero down for eligible buyers. Down payment assistance, gift funds from family, and the first-time buyer IRA exception of up to $10,000 round out the options. Building the cash yourself is still the cheapest path, see how to save for a down payment.

The bottom line on using a 401(k) to buy a home

Financing a home purchase with a 401(k) comes down to one choice: borrow or withdraw. A 401(k) loan is capped at the lesser of $50,000 or 50% of your vested balance, costs no tax and no penalty when repaid in substantially equal payments at least quarterly, and may run longer than five years when it buys your principal residence. An early withdrawal means ordinary income tax plus a 10% additional tax, with 20% withheld up front, roughly a third of the money, and Michigan’s 4.25% on top. There’s no first-time homebuyer exception for 401(k) plans; that $10,000 lifetime break belongs to IRAs.

If you’re ready to buy without raiding your retirement account, talk to Align Lending, we’ll shop your scenario across our lender network, price the 3%-down, FHA, VA, USDA, and MSHDA options side by side, and show you how much cash you actually need. Call 248-506-5727 or start online today.

Footnotes:

1. Example figures are hypothetical and for educational purposes only; they do not constitute an advertisement of credit terms or a rate quote under federal or state lending laws. Your loan amount, cash to close, plan loan limit, and repayment terms depend on your application, your plan document, the property, and market conditions. Return to text.

2. This article is for informational purposes only and is not intended to provide legal, financial, or tax advice. Tax outcomes depend on your filing status, marginal bracket, state of residence, and plan terms; the marginal rate used in this example is illustrative. Consult a qualified tax professional about your specific situation before taking a distribution. Return to text.

3. Align Lending is not acting on behalf of or at the direction of FHA or HUD. FHA down payment, credit score, and loan-to-value requirements are set by HUD and are subject to change. Return to text.

4. Align Lending works with VA-approved lenders and is not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency. VA eligibility, down payment, and funding fee requirements are set by the Department of Veterans Affairs and are subject to change. Return to text.

Sources: 401(k) loan limit of the lesser of $50,000 or the greater of $10,000 or 50% of the vested account balance, five-year repayment, the principal-residence exception, substantially equal payments at least quarterly, and deemed-distribution treatment on default, IRS Retirement Plans FAQs Regarding Loans and IRC § 72(p). The 10% additional tax on early distributions and the absence of a first-time homebuyer exception for qualified plans, IRS Topic No. 558 and the IRS exceptions-to-tax-on-early-distributions table (IRC § 72(t)(2)(F), IRA only, $10,000 lifetime). Mandatory 20% federal withholding on most taxable lump sums paid directly to a participant, IRS Topic No. 412. Qualified plan loan offset rollover deadline of the tax return due date including extensions, IRS Plan Loan Offsets. Hardship distributions for principal residence costs remaining taxable and non-repayable, IRS Retirement Topics, Hardship Distributions. Pro rata treatment of nonqualified designated Roth account distributions, IRS Retirement Plans FAQs on Designated Roth Accounts. Retirement accounts as acceptable assets and the requirement that withdrawals be permitted regardless of employment status, Fannie Mae Selling Guide B3-4.3-03. Exclusion of payments on loans secured by financial assets from the debt-to-income ratio and the reserves offset, Fannie Mae Selling Guide B3-6-05. Gift funds and minimum borrower contribution on a one-unit principal residence, Fannie Mae Selling Guide B3-4.3-04. HomeReady 97% LTV and 80% AMI income limit, Fannie Mae; Home Possible 3% down, 97% LTV, and 80% AMI income limit, Freddie Mac. Closing costs of 2% – 5% of the purchase price, My Home by Freddie Mac. PMI cancellation at 80% and automatic termination at 78% of original value, CFPB and the Homeowners Protection Act. FHA down payment as low as 3.5%, HUD; 96.5% LTV at a 580 decision credit score and 90% LTV at 500 – 579, HUD/FHA risk management requirements. VA purchase loan with no down payment and no PMI or MIP, U.S. Department of Veterans Affairs. USDA 100% financing and 115% area median income limit, USDA Rural Development Single Family Housing Guaranteed Loan Program. Michigan individual income tax rate of 4.25% for the 2026 tax year, Michigan Department of Treasury. MI 10K DPA and MI Home Loan terms, MSHDA. Current average mortgage rates are published weekly in Freddie Mac’s Primary Mortgage Market Survey; no rates are quoted here.

This article is for informational purposes only and is not intended to provide legal, financial, or tax advice. Retirement plan loans and distributions carry tax consequences that depend on your plan document and your personal circumstances; consult a qualified tax professional and your plan administrator before acting. Program terms, limits, and figures shown are illustrative, are not a rate quote or an offer of credit, and are subject to change. Align Lending is an independent Michigan mortgage broker, NMLS #2041154.