Using Your 401(k) to Buy a House: What You Can Actually Do
You can tap your 401(k) for a down payment, but the method you choose determines whether you pay taxes, penalties, or neither
A 401(k) is meant to sit untouched until retirement, but the IRS does allow you to access the money before age 59½ under specific circumstances. For a home purchase, you have three routes: a loan against your balance, a withdrawal under the "substantially equal periodic payments" rule, or the first-time homebuyer exception if your plan offers it. Each route has different tax consequences and repayment terms. The first-time homebuyer exception is the most straightforward if your plan includes it—you can withdraw up to $35,000 without the 10% early withdrawal penalty, though you still owe income tax on the amount.
Before you choose any route, check your plan documents or call your plan administrator to see what options your specific 401(k) actually allows. Not all plans permit loans. Not all plans allow the first-time homebuyer exception. Some employers restrict withdrawals entirely until you leave the job. The rules vary by employer and plan type, so what works for a coworker's 401(k) may not work for yours.
Key Takeaways
- The first-time homebuyer exception lets you withdraw up to $35,000 from your 401(k) without the 10% early withdrawal penalty, though income tax still applies to the withdrawal.
- A 401(k) loan lets you borrow against your own balance and repay it with interest, avoiding taxes and penalties if you repay on schedule—but you must repay within five years for a home purchase.
- If you leave your job after taking a loan, you typically must repay the full balance within 60 days or face taxes and penalties on the unpaid amount.
- Your plan documents determine which options are available to you; not all employers offer loans or the first-time homebuyer exception.
- Withdrawing from your 401(k) reduces the balance that grows tax-deferred for retirement, which can cost you significantly more in lost growth over decades.
The first-time homebuyer exception: up to $35,000 without the 10% penalty
If your 401(k) plan includes the first-time homebuyer exception, you can withdraw up to $35,000 without owing the 10% early withdrawal penalty. The IRS defines "first-time homebuyer" as someone who has not owned a home in the past two years—so you may still may have access to even if you owned a home years ago. The $35,000 limit is per person, so a married couple could each withdraw $35,000 if both meet the definition.
You still owe ordinary income tax on the full amount you withdraw. If you withdraw $35,000 and you are in the 24% tax bracket, you will owe roughly $8,400 in federal income tax, plus any state income tax your state charges. That tax bill is due when you file your return for the year of the withdrawal. Some people set aside money from the withdrawal to cover the tax, or they plan to pay it from other savings.
This exception is only available if your plan document includes it. Older plans or plans at smaller employers sometimes do not. Call your plan administrator or check your Summary Plan Description (the document your employer must give you) to confirm whether your plan allows it. If it does not, you will need to use a loan or another method.
Taking a loan against your 401(k) balance
A 401(k) loan lets you borrow money from your own account and repay it with interest. You do not owe income tax or the 10% penalty as long as you repay on schedule. The IRS allows you to borrow up to 50% of your vested balance, or $50,000, whichever is less. If your account holds $100,000 in vested money, you can borrow up to $50,000. If it holds $60,000, you can borrow up to $30,000.
For a home purchase, the IRS allows you to repay the loan over up to five years. (Other reasons for borrowing, like general expenses, typically allow only one to five years depending on your plan.) You make monthly payments to your own 401(k) account, and the interest you pay goes back into your account as well. The interest rate is usually the prime rate plus 1% to 2%, set by your plan administrator.
The catch: if you leave your job, you must repay the full loan balance within 60 days or face taxes and penalties. If you cannot repay it, the unpaid balance is treated as a withdrawal. You owe income tax on the unpaid amount, plus the 10% early withdrawal penalty if you are under 59½. This risk is real if you are planning to change jobs soon or if your employment is uncertain.
Substantially equal periodic payments: a less common route
The IRS allows you to withdraw money from your 401(k) before age 59½ without the 10% penalty if you take "substantially equal periodic payments" (SEPP). This is a technical rule that requires you to withdraw a calculated amount each year based on your life expectancy and account balance. The calculation is strict, and you must follow it for at least five years or until age 59½, whichever is longer.
This route is rarely used for a home purchase because it locks you into years of withdrawals and the math is complex. You would need to work with a tax professional to set it up correctly. If you make a mistake or stop the payments early, you owe the 10% penalty retroactively on all the withdrawals you took. Most people use the first-time homebuyer exception or a loan instead.
What happens to your retirement savings when you withdraw
Every dollar you take out of your 401(k) stops growing tax-deferred. Over decades, that lost growth can dwarf the amount you withdrew. If you withdraw $50,000 at age 35 and that money would have grown at 7% per year until age 67, that $50,000 would have become roughly $600,000. By withdrawing it now, you give up that future growth.
This is why financial advisors often suggest using other sources first—savings, a gift from family, or a mortgage with a lower down payment and mortgage insurance—before touching your 401(k). The cost of the withdrawal is not just the taxes you pay today; it is the retirement income you will not have later.
Comparing your options in a table
| Method | Penalty on withdrawal | Income tax owed | Repayment required | Risk if you change jobs |
|---|---|---|---|---|
| First-time homebuyer exception | None | Yes, on full amount | No | None |
| 401(k) loan | None (if repaid on time) | None (if repaid on time) | Yes, within 5 years | Must repay in 60 days or face taxes and 10% penalty |
| SEPP (substantially equal payments) | None (if rules followed) | Yes, on each withdrawal | Yes, for 5+ years | Retroactive 10% penalty if you stop early |
Steps to take before you withdraw or borrow
First, contact your plan administrator or your employer's benefits department and ask for a copy of your Summary Plan Description. This document explains what withdrawals and loans your plan allows. Ask specifically whether the plan offers the first-time homebuyer exception and whether loans are available for home purchases.
Second, get a statement of your current 401(k) balance and your vested balance. The vested balance is the money that legally belongs to you; unvested money (usually from employer matching) may not be available to borrow or withdraw. If you have a loan outstanding, ask how much you still owe and what the repayment term is.
Third, if you are considering a loan, think through your job situation. If there is any chance you will change jobs in the next five years, a loan carries real risk. If you are stable in your role, a loan may be safer than a withdrawal because you avoid taxes and penalties as long as you repay.
Fourth, talk to a tax professional or financial advisor about the tax impact. A withdrawal of $35,000 will increase your taxable income for the year, which may push you into a higher tax bracket or affect other tax benefits you claim. An advisor can show you the actual cost in your situation.
Frequently Asked Questions
Does the first-time homebuyer exception apply if I owned a home 10 years ago?
Yes. The IRS rule is that you cannot have owned a home in the past two years. If you owned one 10 years ago but have not owned one since, you meet the definition of first-time homebuyer for this exception. The exception is about your current status, not your entire history.
What if I take a 401(k) loan and then get laid off?
You must repay the full loan balance within 60 days of leaving your job, or the unpaid amount is treated as a taxable withdrawal. If you cannot repay it, you owe income tax on the unpaid balance plus the 10% early withdrawal penalty. Some plans allow a longer repayment period if you negotiate with the plan administrator, but 60 days is the standard rule.
Can I withdraw from my spouse's 401(k) to buy a house?
No. You can only withdraw from or borrow against your own 401(k). Your spouse can withdraw from or borrow against their own account if they meet the rules. If you are married and both have 401(k)s, you each have separate limits and options.
If I take the first-time homebuyer exception, can I put the money back later?
No. A withdrawal is permanent; you cannot "repay" it to restore your account balance the way you can with a loan. Once the money is out, it is out. The only way to rebuild your 401(k) is through new contributions from your paycheck.
Will withdrawing from my 401(k) affect my mortgage application?
A withdrawal itself does not appear on your credit report and does not directly affect your mortgage application. However, if the withdrawal reduces your income for tax purposes (because it is not counted as earned income), it could affect how much a lender will lend you. Talk to your mortgage lender about how they treat 401(k) withdrawals in their income calculations.