401Ks and Retirement Accounts as a Down Payment

It may be possible to tap into your 401K or other retirement account to use as a down payment on a new home. Just make sure you understand the consequences of doing so first. Ideally, these accounts are best when used not as down payment funds, but rather as “reserve funds” that you can draw against should you encounter financial trouble in the future. These funds have the added benefit of proving to the lender that you have a history of saving so either way, always provide recent statements to your lender.

When considering 401K funds for your down payment, always start by verifying your employer’s policy regarding this. Whether you’re allowed to cash out a portion of or borrow against the fund has different implications. Regardless of how you work it, always get copies of any transactional paperwork and keep in a safe place. Make copies of any checks that are issued as well as personal bank account deposit slips.

Even though the money in a 401K is your own, lenders may consider borrowing against these funds a liability. From a lenders perspective, these funds need to be repaid just as you have to repay car loans and credit card balances. This is not necessarily a bad thing. But if your debt-to-income qualifying ratio is already tight, it is a situation requiring careful consideration.

If the additional obligation won’t interfere with your mortgage approval, it’s probably okay to borrow against the fund. Otherwise, cashing out a portion may make better sense, even if there’s a penalty involved.