Yes, you can use your 401(k) to buy a house, and federal law gives you two ways to do it: borrow against your vested balance as a plan loan, or take a hardship withdrawal. A loan lets you access up to $50,000 without triggering taxes as long as you repay on schedule. A hardship withdrawal permanently removes the money and brings income tax plus a 10% early withdrawal penalty if you’re under 59½. Neither option is guaranteed, though. Your employer’s plan decides what’s actually available, so read the summary plan description before you build a home-buying budget around retirement money.
Borrowing From Your 401(k)
Under IRC Section 72(p), a 401(k) loan is capped at the lesser of $50,000 or half your vested balance. If your vested balance is under $20,000, you may be able to borrow up to $10,000 even though that exceeds the 50% threshold.1Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Because it’s a loan and not a distribution, you owe no income tax and no penalty as long as you keep paying.
The $50,000 cap gets reduced by your highest outstanding loan balance from the plan during the prior 12 months. If you borrowed $20,000 last year and paid it down to $5,000, your new maximum isn’t $50,000. It’s $50,000 minus $20,000, plus the $5,000 still owed, which works out to $35,000.1Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts The rule prevents rolling loans to extract more than the cap over time.
Standard plan loans have to be repaid within five years. Loans used to buy a principal residence are exempt from that deadline, and many plans stretch home-purchase loan terms to 15, 20, or even 30 years.1Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Repayments come out of your paycheck after tax, and both principal and interest flow back into your own account.
Interest Rate
The Department of Labor requires 401(k) loans to carry a reasonable interest rate. Most administrators set theirs at prime plus one percentage point. With the prime rate at 6.75% in early 2026, that puts a typical 401(k) loan rate near 7.75%. The interest goes back into your account rather than to a bank, though you’re repaying with after-tax dollars, and when you eventually withdraw that money in retirement you’ll pay tax on it again.
Spousal Consent
If you’re married, your plan may require written spousal consent for a loan over $5,000. This applies to plans that offer annuity-style payouts. Most 401(k) plans are structured as profit-sharing plans and skip the requirement, provided the plan names the surviving spouse as the full death beneficiary and doesn’t offer a life annuity option.2Internal Revenue Service. Retirement Topics – Plan Loans Some plans require consent anyway, so check the summary description.
Taking a Hardship Withdrawal
A hardship withdrawal permanently removes money from your account. You don’t repay it, and the balance is reduced for good. The IRS treats “costs directly related to the purchase of an employee’s principal residence (excluding mortgage payments)” as an automatic qualifying hardship under its safe harbor rules.3Internal Revenue Service. Retirement Topics – Hardship Distributions Down payments and closing costs qualify. Ongoing mortgage payments do not.
The amount is limited to what you actually need for the purchase, including any taxes the distribution itself will trigger. Before approving the withdrawal, the plan administrator relies on your written certification that you can’t cover the expense through other resources like insurance reimbursement, liquidating other assets, or taking a plan loan. You don’t have to take a plan loan first if doing so would disqualify you from getting the mortgage you need.3Internal Revenue Service. Retirement Topics – Hardship Distributions
One older rule no longer applies: plans used to suspend new contributions for six months after a hardship distribution. The Bipartisan Budget Act of 2018 eliminated that, and as of 2020 plans are prohibited from imposing it.4Internal Revenue Service. Correct Common Hardship Distribution Errors You can keep contributing right after the withdrawal.
Whether Your Plan Even Offers These Options
Federal law permits plans to offer loans and hardship withdrawals but doesn’t require it.5Internal Revenue Service. Retirement Plans FAQs Regarding Hardship Distributions Some employers offer loans but not hardship withdrawals, some offer both, some offer neither. Plans that allow loans may cap how many you can have outstanding at once.6Internal Revenue Service. Borrowing Limits for Participants With Multiple Plan Loans Your summary plan description is the only definitive source.
Taxes and the 10% Penalty
A 401(k) loan doesn’t trigger taxes or penalties while you’re paying on schedule. A hardship withdrawal does.
The full withdrawal counts as ordinary taxable income in the year you receive it. Because hardship distributions can’t be rolled over, they carry a default 10% federal withholding at the time of distribution.7Internal Revenue Service. 401(k) Resource Guide – Plan Participants – General Distribution Rules That withholding is a prepayment. If your marginal rate is 22% or higher, you’ll owe more at filing. State income tax stacks on top, from 0% in no-tax states to over 13% in the highest brackets. All in, taxes can consume 25% to 40% of a hardship withdrawal.
If you’re under 59½, the IRS adds a 10% early withdrawal penalty on top of the income tax.8Internal Revenue Service. Topic No. 558, Additional Tax on Early Distributions From Retirement Plans Other Than IRAs On a $40,000 withdrawal, that’s $4,000 before any income tax is figured. There is no general homebuyer exception that waives this penalty for 401(k) plans.
The IRA First-Time Homebuyer Exception Does Not Apply Directly
IRAs get a narrow penalty exception. A qualified first-time homebuyer can withdraw up to $10,000 over their lifetime without the 10% penalty under IRC Section 72(t)(2)(F). “First-time homebuyer” is defined loosely, covering anyone who hasn’t owned a principal residence in the prior two years, along with a spouse, children, grandchildren, and parents.1Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts The funds must be used within 120 days.
The exception applies only to IRAs, not to 401(k) plans.9Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions Some people work around this by rolling their 401(k) into an IRA and then taking $10,000 penalty-free. It’s legal, but you still owe income tax on the $10,000, the cap is a lifetime limit, and the rollover takes time. In most cases you also need to have actually left the employer sponsoring the 401(k), because in-service rollovers are uncommon for participants under 59½.
What Happens If You Leave Your Job With a Loan Outstanding
This is where 401(k) loans turn dangerous. If you quit, get laid off, or are fired while you still owe on a plan loan, the plan will typically offset your remaining account balance by the unpaid loan amount. That offset is treated as a distribution: taxable income, plus the 10% penalty if you’re under 59½.10Internal Revenue Service. Plan Loan Offsets
You can avoid the tax hit by rolling over the offset amount into an IRA or another eligible retirement plan. The deadline is your federal tax return due date, including extensions, for the year the offset happens.10Internal Revenue Service. Plan Loan Offsets That’s usually mid-October if you extend. But you have to come up with the cash from somewhere else, because the loan money is already spent. If you borrowed $30,000 and still owed $18,000 at separation, you need $18,000 in cash to complete the rollover.
Impact on Mortgage Approval
Fannie Mae’s guidelines confirm that vested 401(k) funds are an acceptable source for down payments, closing costs, and reserves.11Fannie Mae. Retirement Accounts The complication is the loan option: a 401(k) loan repayment becomes a new monthly obligation that counts against your debt-to-income ratio.12Fannie Mae. Debt-to-Income Ratios
For a manually underwritten loan, DTI generally can’t exceed 45%. For loans run through Fannie Mae’s automated system, the ceiling is 50%.12Fannie Mae. Debt-to-Income Ratios A $300 monthly 401(k) loan payment counts against you like a $300 car payment would. Run the math first, because a 401(k) loan that boosts your down payment but pushes your DTI past the limit defeats the purpose.
A hardship withdrawal creates no ongoing repayment, so it doesn’t inflate DTI. The lender will still want to see the funds land in your bank account and verify the source.
The Real Cost: Lost Growth
The dollar figure you pull is only part of the cost. Money in a 401(k) compounds for decades, and removing it interrupts that. Schwab’s 2026 long-term capital market expectations project U.S. large-cap stocks to return roughly 5.9% annually over the next decade, with bonds around 4.8%.13Charles Schwab. Schwab’s 2026 Long-Term Capital Market Expectations
Concretely: a $30,000 withdrawal at age 35 doesn’t just cost $30,000. At 5.9% annually, that money would have grown to roughly $57,000 in 10 years and over $108,000 in 20. With a loan, you’re repaying principal and earning the loan interest rate instead of market returns during the repayment period. If the market returns 5.9% and your loan rate is 7.75%, you’re technically ahead on the interest math while you’re paying yourself back. If you leave your job and can’t complete the rollover, the math flips hard.
For someone in their 20s or 30s, lost compounding usually dwarfs the 10% penalty and tax costs combined. For someone in their 50s, the compounding window is shorter and the calculus is less punishing.
How to Request the Funds
Once you’ve decided which option to use, gather documents and submit through your plan administrator.
- Fully executed purchase and sale agreement showing the property address and price.
- Mortgage pre-approval letter, if the administrator asks for it.
- Confirmation of your vested balance, net of any existing loans.
- Routing and account numbers for electronic transfer.
For a hardship withdrawal, you’ll certify in writing that you can’t cover the expense through other available resources. For a loan, you’ll pick the repayment term and confirm your payroll deduction frequency.
Most administrators offer an online portal for uploads and e-signature. Review usually takes a few business days for a straightforward request and up to 10 or more for complex ones. Once approved, funds typically arrive by direct deposit within a few additional business days; paper checks add mailing time. Start to finish, plan on one to three weeks. Tight timelines are the most common source of trouble in this process, and they’re avoidable if you start well before closing.