Should You Use Your 401(k) to Buy a House in Austin?

If you’re house hunting and your savings account isn’t quite where it needs to be, it might be tempting to look toward your 401(k) retirement account for help. After all, it’s your money. And what better long-term investment than a home, right?

But using retirement savings for a home purchase is a serious financial decision. Tapping into your 401(k) could help you close on the house you want—but it could also shrink your retirement fund, create unexpected tax liabilities, and cause long-term damage to your financial future if not done carefully.

In this guide, we’ll walk through the two main ways you can use your 401(k) to buy a house, the pros and cons of each strategy, real-world risks to consider, and smarter alternatives that might get you home faster without raiding your retirement account.

How a 401(k) Loan Works

If your plan allows it, taking a loan from your 401(k) can be a relatively quick way to access cash for a down payment or closing costs. You’re essentially borrowing from your own savings and repaying yourself over time, with interest.

Typically, you can borrow up to $50,000 or 50% of your vested balance (whichever is lower). The interest rate is usually based on the prime rate plus 1 or 2 percentage points. Repayments are deducted from your paycheck automatically, and the interest goes back into your own 401(k) account.

Many plans allow longer repayment terms (often up to 15 years) if the funds are used to purchase a primary residence.

Unlike a traditional loan, a 401(k) loan does not impact your credit score. It also won’t appear as debt on your credit report—a key benefit if you’re applying for a mortgage at the same time.

However, there are significant drawbacks. While your money is out of the market, it’s not compounding—you miss out on potential investment growth. If you leave your job or get laid off before the loan is fully repaid, the remaining balance may be considered a taxable distribution. That means you could owe income tax plus a 10% early withdrawal penalty on the unpaid portion.

Hypothetical Example: How a 401(k) Loan Can Affect Retirement

Imagine a borrower has $120,000 in their 401(k) and takes out a $40,000 loan to cover a down payment. They set up a 10-year repayment plan through their paycheck, and the loan has minimal impact on their mortgage application because it's not reflected in their debt-to-income ratio. But while that money is out of the market, it misses potential years of investment growth. If they were to leave their job or run into unexpected expenses, the risk of a tax penalty becomes very real. This strategy can work—but only under the right financial circumstances and with a clear understanding of the risks involved.

How a 401(k) Hardship Withdrawal Works

Unlike a loan, a hardship withdrawal permanently removes funds from your 401(k) account. You don’t repay it. That means you lose both the principal and all the future growth it could have earned over decades.

Some employers allow hardship withdrawals for specific expenses, including the purchase of a primary residence. However, this approach is often a last resort.

Withdrawals are treated as income and taxed accordingly. If you’re under 59½, you’ll also pay a 10% early withdrawal penalty unless you qualify for an exemption. It’s important to note that the first-time homebuyer penalty exemption only applies to IRAs, not 401(k) accounts.

In other words: if you withdraw $30,000, you could lose $9,000 or more right off the top in taxes and penalties—and that’s before you account for the long-term cost of lost compound growth.

The Long-Term Cost of Lost Growth

One of the most overlooked consequences of tapping your 401(k) is the opportunity cost. Every dollar withdrawn or borrowed is a dollar that’s no longer earning compound interest.

Let’s say you take out $40,000 at age 35. If that money was left in your retirement account and earned an average of 7% annually, it would grow to over $300,000 by the time you reach retirement.

Using your 401(k) for a home purchase might solve a short-term problem but create a long-term hole in your financial future. That’s why we typically advise homebuyers to explore all other options first.

Why Buyers Consider Their 401(k)

In a competitive housing market like Texas, buyers are often under pressure to move quickly. A lower-than-expected appraisal, a hot property with multiple offers, or a need to waive contingencies can all create last-minute cash crunches.

In these moments, a 401(k) can feel like a safety net. And technically, it is. But the long-term financial hit can be significant—especially if the home purchase doesn’t go exactly as planned.

Before making that move, consider:

• Is this home worth altering your retirement plan?
• Do you have alternative financing strategies?
• Are you fully aware of the tax implications?
• Can you afford to repay the loan if your employment changes?

Better Alternatives to Tapping Your 401(k)

There are many smarter ways to access funds for a home purchase without jeopardizing your retirement savings:

• Low Down Payment Loan Options. You might not need as much cash as you think. With FHA, VA, USDA, and even conventional 3% down mortgages, many buyers can get into a home with far less than 20% down. Explore loan options available through LendFriend that are designed for first-time and budget-conscious buyers.
• Gift Funds. Gifted funds from family members are one of the most common and overlooked ways to cover a down payment. Lenders allow buyers to use gifts from immediate family members, such as parents or siblings, to help with both down payments and closing costs. The key is documentation. You’ll need a gift letter confirming that the money is a gift (not a loan) and may need to provide evidence of the transfer, such as bank statements. But once documented properly, gifted funds are a powerful tool to bridge financial gaps—with no penalties, no interest, and no repayment obligations. If your family is willing and able to help, this can often be a far better solution than withdrawing from retirement savings.
• Down Payment Assistance Programs. State and local governments, especially in Texas, offer grants and forgivable loans to help cover upfront costs. These programs are often underutilized—but at LendFriend, we help clients navigate and apply for assistance they qualify for.
• IRA Withdrawals. While IRAs have different rules, first-time homebuyers can withdraw up to $10,000 from a traditional IRA without the 10% penalty. Taxes still apply, but this option may be less costly than a 401(k) hardship withdrawal.
• Specialty Loan Programs. At LendFriend, we offer mortgage solutions tailored for retirees, entrepreneurs, self-employed individuals. If you're in a cash crunch but already own a home, you may want to explore a buy before they sell. Option instead of withdrawing from your 401(k). These programs are designed to address unique financial situations without forcing you to tap into retirement savings.

Final Thoughts: Know Before You Withdraw

Can you use your 401(k) to buy a house? Yes. Should you? That depends entirely on your financial situation, risk tolerance, and long-term goals.

If you have no other path to homeownership and your 401(k) loan is manageable, it could be a viable strategy. But in most cases, it’s worth exhausting other options first—especially when you have a team like LendFriend on your side to explore alternatives.

Before you move any money out of your retirement account, speak with a financial advisor and talk to your loan team. We’ll help you review your mortgage options, identify local programs, and chart a strategy that gets you into a home today without compromising your future tomorrow.

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.