How can I use my 401(k) for a down payment?

For many first‑time home buyers, the biggest hurdle isn’t credit, income, or even finding the right house. It’s assembling a down payment while rent, student loans, and everyday expenses continue to rise.

 Using a portion of your 401(k) to fund the down payment has become a practical solution for many homebuyers a home has moved from a theoretical question to a practical one. For a large number of buyers, a 401(k) represents their most meaningful pool of capital. When used thoughtfully, it can shorten the path to homeownership, improve loan terms, and reduce long‑term housing costs.

This isn’t about raiding retirement or making emotional decisions. It’s about understanding how a 401(k) can be used as a tool—one that works well in certain situations and poorly in others.

This guide breaks down how first‑time home buyers can use a 401(k) for a down payment, how lenders view those funds, when it can meaningfully improve a purchase, and—at the end—what risks should be understood before making a final decision.

How a 401(k) Can Support a First‑Time Home Purchase

A 401(k) is designed for retirement, but the IRS allows limited access under specific rules. That flexibility exists because life doesn’t always follow a straight line. Buying a home is often one of the largest financial steps a household takes, and retirement accounts sometimes play a supporting role.

For first‑time buyers, the value of using a 401(k) isn’t simply “getting cash.” It’s what that cash does inside the mortgage structure.

A stronger down payment can:

• Reduce or eliminate monthly mortgage insurance
• Improve interest rates and pricing adjustments
• Increase approval confidence in competitive offers
• Preserve post‑closing liquidity for repairs and reserves

In other words, a 401(k) isn’t just a funding source—it can be a leverage point.

The Two IRS‑Approved Ways to Use a 401(k) to buy a home

The IRS does allow first‑time home buyers to access 401(k) funds, but only under clearly defined rules. Understanding these rules is critical, because the way money is taken from a 401(k) determines how expensive—or efficient—the strategy ultimately becomes.

Broadly speaking, first‑time buyers can use 401(k) funds in one of two ways:

• A 401(k) loan, which temporarily borrows against your retirement balance
• A 401(k) withdrawal, which permanently removes money from the account

Both options can be used toward a home purchase, including a down payment and closing costs. The difference lies in what happens after the money is accessed.

A 401(k) loan is generally viewed as a financing decision. The money is expected to be repaid, the retirement account remains intact over time, and the cost of access is largely limited to opportunity cost while the loan is outstanding.

A 401(k) withdrawal is a liquidation decision. Once the funds are withdrawn, they no longer benefit from tax‑deferred growth, and the buyer must account for taxes, penalties, and the permanent reduction to retirement savings.

Because of those structural differences, the two options can lead to very different long‑term outcomes—even if the same dollar amount is used for the home purchase.

Using a 401(k) Loan for a First‑Time Home Buyer

A 401(k) loan allows you to borrow against your retirement balance without permanently removing money from the account. Most employer plans allow loans up to 50% of the vested balance, with a maximum of $50,000.

For many first‑time buyers, this is the most balanced way to use a 401(k) for a house down payment.

Here’s why it’s often effective:

• No 10% early withdrawal penalty
• No income taxes due when the loan is taken
• Interest is paid back into your own retirement account
• The loan does not appear on your credit report
• Mortgage lenders typically do not include it in debt‑to‑income ratios

From an underwriting perspective, a properly documented 401(k) loan is usually a clean and acceptable source of funds.

Example:
An Austin buyer earning $110,000 uses a $40,000 401(k) loan to move from a 5% down payment to 10% on a $520,000 home. The larger down payment eliminates monthly mortgage insurance and improves pricing. The added 401(k) loan payment is offset by lower housing costs.

When income is stable and the loan amount is reasonable, a 401(k) loan can materially improve affordability.

Using a 401(k) Withdrawal for a Home Purchase

A 401(k) withdrawal permanently removes money from retirement savings. That makes it a more serious decision—but not automatically a wrong one.

Some buyers explore this route when savings are limited and housing markets are competitive. While early withdrawals are generally subject to income taxes and a 10% penalty, the option still exists under IRS rules.

Temporary relief under the CARES Act allowed penalty‑free withdrawals during the pandemic, which led many buyers to associate 401(k) withdrawals with home purchases. Those rules were designed for a specific economic emergency and applied only for a limited window. They have since expired, and standard withdrawal rules now apply, including income taxes and potential penalties. Today, the CARES Act should be viewed as historical context—not an ongoing strategy for funding a home purchase.

Example:
A Denver buyer withdraws $30,000 from a 401(k) to supplement savings and reach a minimum down payment threshold. After taxes, the net amount is lower than expected, but it allows the purchase to move forward in a market where waiting would likely mean higher prices.

Withdrawals require careful math and realistic expectations, but in specific scenarios they can still support a purchase.

How Mortgage Lenders View 401(k) Funds

Mortgage lenders are less concerned with where money comes from than whether it is legitimate, documented, and available on time.

When a buyer uses a 401(k) for a down payment, lenders typically verify:

• The source of funds (loan vs. withdrawal)
• Transaction documentation from the plan administrator
• That any required taxes or penalties were accounted for
• That funds are accessible prior to closing

In fast‑moving markets like Atlanta, timing is critical. Buyers using 401(k) funds should initiate loans or distributions early so earnest money deposits and closing timelines aren’t affected.

When handled correctly, 401(k) funds are acceptable for conventional, FHA, and jumbo loans.

Why a 401(k) Can Strengthen an Offer

In markets like Austin, Denver, and Atlanta, first‑time buyers often compete against repeat buyers with built‑in equity.

Using a 401(k) strategically can meaningfully level the playing field for first‑time buyers who are competing against homeowners with years of accumulated equity.

• Increase down payment strength without draining cash reserves. Tapping a 401(k) allows buyers to put more money down while still preserving liquid cash for inspections, repairs, moving costs, and unexpected expenses. That balance is especially important for first‑time buyers who don’t have prior home equity to fall back on.

• Improve offer competitiveness in multiple‑bid situations. In competitive markets, sellers often prioritize offers with stronger down payments because they signal financial stability and reduce the risk of financing issues. A higher down payment—funded in part by a 401(k)—can make an offer stand out even if the purchase price isn’t the highest.

• Reduce long‑term borrowing costs. A larger down payment can lower interest rates, reduce or eliminate mortgage insurance, and decrease total interest paid over the life of the loan. Over time, those savings can outweigh the short‑term cost of borrowing from retirement.

• Provide flexibility after closing. Keeping more cash on hand post‑closing gives buyers room to handle maintenance, upgrades, and life changes without relying on high‑interest credit. That flexibility often makes early homeownership less stressful and more sustainable.

For many buyers, this flexibility is the difference between continuing to rent and successfully buying a home.

When Using a 401(k) As a First Time Homebuyer Makes the Most Sense

Using a 401(k) to buy a first home tends to work best when several conditions line up at the same time.

• Employment is stable and income is predictable. A 401(k) loan works best when there is confidence in continued employment. Stable income makes repayment manageable and reduces the risk of a loan becoming due early because of a job change or layoff.

• The amount used is modest relative to total retirement savings. Using a portion of a healthy retirement balance is very different from draining an account. When the remaining 401(k) balance is still substantial, the long‑term impact of borrowing or withdrawing is far easier to absorb.

• There is a clear and realistic repayment plan. Successful buyers treat a 401(k) loan like a temporary bridge, not a permanent crutch. Knowing how quickly the loan will be repaid—and how that repayment fits into monthly cash flow—keeps the strategy controlled.

• The mortgage structure meaningfully improves because of the added funds. Using a 401(k) works best when it changes the math in a real way: eliminating mortgage insurance, improving pricing, strengthening an offer, or reducing total interest costs. If the added funds don’t materially improve the loan terms, the tradeoff is often not worth it.

Example:
An Atlanta buyer with a $380,000 401(k) balance uses a $25,000 loan to reduce mortgage insurance and improve cash flow. The loan is repaid within three years, while home appreciation and lower monthly costs outweigh the temporary tradeoff.

Risks and Tradeoffs to Understand Before Using a 401(k) As a First Time Homebuyer

While using a 401(k) can help unlock homeownership, it’s important to understand the downsides clearly.

• Leaving your job may accelerate repayment of a 401(k) loan
• Withdrawals permanently reduce retirement savings
• Taxes and penalties can reduce usable funds
• Borrowed funds may miss market growth during repayment

For example, a $25,000 withdrawal in your early 30s isn’t just $25,000 gone—it’s decades of compounded growth you no longer participate in. Left invested in a diversified 401(k), that money may have decades to grow through market cycles, dividends, and reinvestment. Over 30 years, even modest annual returns can turn a relatively small balance into well over six figures.

That said, this comparison isn’t one‑sided. Buying a home also creates its own form of compounding. Home appreciation, principal paydown, and rising rents avoided all contribute to long‑term net worth. In strong markets, a well‑timed home purchase can build equity faster than retirement assets alone. The tradeoff isn’t “investing versus wasting money”—it’s choosing where your capital compounds and whether the home purchase meaningfully accelerates your overall financial trajectory.

These risks don’t mean a 401(k) should never be used. They mean the decision should be intentional, sized appropriately, and aligned with long‑term financial stability.

The Bottom Line for First‑Time Home Buyers

Yes—first‑time home buyers can use a 401(k) to buy a house, and in the right situation, it can be a smart and empowering move.

A 401(k) loan is often the most efficient and flexible option. A 401(k) withdrawal requires more caution but may still make sense in limited circumstances.

Homeownership is still achievable, even in competitive markets. The goal isn’t to protect retirement accounts at all costs—it’s to use every tool available wisely, with a clear understanding of both the rewards and the responsibilities involved.

This is where working with an experienced mortgage broker matters. At LendFriend Mortgage, we help first-time buyers evaluate whether using a 401(k) actually improves the loan structure—or whether a different approach delivers a better outcome with less long-term cost. The right answer isn’t generic. It depends on income, reserves, timing, and how the mortgage is built from the start.

Let’s talk about your goals and figure out the best way to get you home—wherever that home may be.  Talk to a LendFriend expert or call us directly at 512.881.5099.