Author bio section

I am the author of this blog and also a top-producing Loan Officer and CEO of InstaMortgage Inc, the fastest-growing mortgage company in America. All the advice is based on my experience of helping thousands of homebuyers and homeowners. We are a mortgage company and will help you with all your mortgage needs. Unlike lead generation websites, we do not sell your information to multiple lenders or third-party companies.

Borrowing from 401K or IRA

Securing a down payment is often cited as the biggest challenge for buying a home – both for First Time Home Buyers and Move-up Buyers.

To overcome these challenges, you can consider borrowing from retirement funds – 401k and IRA.

Here is how it works.

Borrowing Against 401k for Down Payment


How Much Can I Borrow From My 401k?

You can borrow 50% of your vested balance or $50,000 whichever is lower.

How Do I Pay It Back?

The repayment term is usually between 5 and 15 years. The payment which includes interest is deducted directly from the paycheck and deposited back into your 401k account.

Understand the terms of your 401k carefully as some plans may require you to pay off the remaining balance in a lump sum if you leave that organization.

Since you are borrowing from yourself (it’s your savings), the payment is not considered a debt and not included in the debt-to-income ratio calculations for mortgage qualification.

What Are The Tax Implications of Borrowing from 401k?

Note that borrowing from 401k and withdrawing have different tax implications. You can borrow up to 50% of the vested balance (or $50,000 whichever is lower) with no tax implications.

On the other hand, any withdrawal will have a 10% penalty on top of the income tax that you will need to pay. After adjusting for taxes and penalty, you might end up with only 60% of your withdrawal amount.

Get Pre-Approved for buying your next home

Borrowing Against IRA for Down Payment


How Much Can I Borrow From IRA and What Are The Tax Implications?

From Roth IRA you can withdraw contributions any time with no tax implications. After you have held the account for 5 years, you can withdraw an additional $10,000 from the earnings with no penalty or taxes.

From Traditional, SEP or SIMPLE IRA, you can withdraw $10,000 with no penalty. And if you are married, your spouse can withdraw another $10,000. That could mean a total of $20,000 contribution towards down payment with no penalty or taxes.

For all the IRAs the withdrawn earnings have to be used within 120 days to avoid the 10% penalty.

Get a Customized Personalized Rate Quote

Disclaimer – I am not a CPA, nor do I play one on the internet. Make sure to consult your accountant about tax implications specific to your situation.

You May Also Like to Read:

12 Ways to Secure a Down Payment on your next Home Purchase

Related Posts

  • 93
    Home prices have completely stabilized and the shortage in housing supply is fast becoming a thing of past. Great news then for potential homebuyers who have come right into the mix! Only time will tell whether we are nearing the tail-end of the present cycle but from the looks of…
    Tags: $, buyers, time, buying, process, compare, california, mortgage, rates
  • 92
    Why you need Home Warranty? For many new owners, this is a great way to gain peace of mind about problems that they used to call the landlord to fix; ones that often aren't covered under their homeowner's insurance. But make sure you read your contract carefully to see what…
    Tags: $, will, buying, process, compare, california, mortgage, rates
  • 91
    What is home inspection? A home inspection- is a limited examination of a home's condition and is done when a home is put on the market for sale. State Laws do not require to have a home inspection or the number of inspectors you should bring. But even if the…
    Tags: buying, process, compare, california, mortgage, rates
  • 91
    Most lenders will require that you have homeowners insurance in place before the closing. This is also be called hazard insurance because it covers natural disasters like fire and storms, and theft. Why do you need insurance for a house? The lender won't fund the loan on a property that…
    Tags: will, buying, process, compare, california, mortgage, rates
  • 89
    If you are thinking of buying your first home in the Bay Area, you don't want to miss this free event. I am leading a panel discussion titled - "How to buy your first home in the Bay Area". The seminar is on October 27th, 2013 at 3:00 PM. The…
    Tags: time, buying, will, mortgage, tax, account, process, compare, california, rates