Last Updated: June 10, 2025

Can I Use My 401(k) to Buy a House?

For many aspiring homeowners, the biggest hurdle to buying a house is the down payment. If you’re looking at your retirement savings and wondering, “Can I use my 401(k) to buy a house?” — the answer is yes, but with important caveats.

In this article, we’ll break down the options, risks, and what you need to know before tapping your 401(k) to purchase a home.

1. Two Ways to Use a 401(k) to Buy a Home

a. 401(k) Loan

Most employer-sponsored 401(k) plans allow you to borrow against your balance. You can typically borrow up to $50,000 or 50% of your vested balance — whichever is less.

Pros: No credit check, interest paid goes back into your account, no tax penalty if repaid on time
Cons: Must be repaid within 5 years (or 15 years for a primary residence), and if you leave your job, the loan is due immediately

b. 401(k) Hardship Withdrawal

This option allows you to withdraw funds for a qualifying hardship — like buying a first home.

Pros: Access your funds without needing to repay them
Cons: Subject to income tax and, if you’re under 59½, a 10% early withdrawal penalty (unless exceptions apply)

2. Should You Use Your 401(k) to Buy a House?

While you can use your 401(k), financial experts generally recommend doing so only as a last resort. Here’s why:

You’ll miss out on compound growth in your retirement account
Early withdrawals can incur hefty taxes and penalties
Repayment failure on a 401(k) loan could result in the balance being treated as a taxable distribution

That said, if it’s the only way to secure a home or escape high rent, it might be worth exploring — especially if you’re disciplined about replacing the funds.

3. Alternative Options to Consider

Before using your 401(k), explore these alternatives:

a. Roth IRA:

If you’ve had your Roth IRA for at least 5 years, you can withdraw up to $10,000 of earnings penalty-free as a first-time homebuyer. Contributions can also be withdrawn anytime without taxes or penalties.

Example:
You have $30,000 in your Roth IRA (made up of $22,000 in contributions and $8,000 in earnings). You could withdraw the $22,000 anytime, and up to $10,000 of the $8,000 earnings penalty-free to put toward your first home.

b. Gift funds from family:

Many lenders allow family members to gift you money for your down payment, as long as the funds are properly documented and accompanied by a gift letter.

Example:
Your parents decide to gift you $15,000 toward your down payment. You provide the lender with a signed gift letter stating the funds don’t need to be repaid, making it easier to qualify.

c. Down payment assistance programs:

Local, state, and nonprofit programs can provide grants, forgivable loans, or second mortgages to help with down payment or closing costs—often aimed at first-time or low-to-moderate-income buyers.

Example:
You qualify for a city program offering a $10,000 forgivable loan if you stay in the home for 5 years. This loan doesn’t need to be repaid unless you sell early.

d. FHA loans:

Backed by the government, FHA loans require just 3.5% down, making them more accessible for buyers with limited savings or lower credit scores.

Example:
You want to buy a $300,000 home. Instead of needing a $60,000 (20%) down payment, you could qualify for an FHA loan with just $10,500 down, making homeownership far more attainable.

4. Bottom Line

Yes, you can use your 401(k) to buy a house — either via a loan or hardship withdrawal. But just because you can doesn’t mean you should. Consider all the trade-offs, and consult with a financial advisor before making a decision that could impact your retirement future.

Photo credit:amnarj2006