So you want to buy a home...But...
There is just something standing between you, and your new house: The down payment, the closing costs, or both. What options are out there for you?
Many home buyers today opt to use funds from their employer’s 401(K) program to come up with the down payment or closing costs on a house. Ordinarily, you can't take money from your 401(K) plan unless you retire, leave the company, or become disabled. But, many company plans permit certain “hardship withdrawals” when there is an immediate and heavy financial need, including the purchase of the employee's principal residence.
The drawback to a hardship withdrawal is that you will pay taxes and penalties on the amount withdrawn from your plan, which often must be paid at the time of withdrawal, or at tax time for the year of withdrawal. And while hardship withdrawals are allowed by law, your employer is not required to provide them in your plan. So it is very important to check with your employer’s human resources department ahead of time to be sure your 401(K) plan allows hardship withdrawal.
Another approach may be to borrow against your 401(K) – often as much as 50 percent of your account balance. You pay interest on the loan, but the interest goes back into your account. The money you receive is not taxable as long it is paid back and plans can give you anywhere from five to 30 years to pay back your loan. Remember, the payment will be added in as another debt, so make sure, when you call the human resource department, you ask what the approximate payment amount would be.
There are risks involved in borrowing from your 401(K). If you lose your job or leave your employer, you will have to pay back the loan in full within a short period, sometimes as little as 60 days. If the money is not paid back in that time, it is considered a withdrawal from your plan and subjected to taxes and penalties. And while 401(K) accounts can usually be rolled over into a new employer’s 401(K) without penalties, loans from a 401(K) cannot be rolled over.
In addition, because the funds withdrawn from your account are no longer earning compound interest, your account will be smaller when you retire. And you’ll be replacing pretax money with after-tax money.
Lenders will count the money you borrow from your 401(K) as an additional debt that will go along with your car payments, student loans and credit cards. While it may seem unfair since you are borrowing your own money, lenders view it as a payment obligation that affects your debt-to-income ratio in qualifying for a home loan. It may be a factor in whether you decide to make a hardship withdrawal from your 401(K) and pay tax penalties or borrow against it.
So, call your Human Resource Department and get the information, then pick up the phone and call me or email me and let's see if we can make this work! Sherry Bitner 941-504-1445, Sherry@SherryBitner.com