Can I Use My 401K to Buy a House

Purchasing a home is an investment — but does that mean you should look to other investments to finance it?

In this article, I help to dispel some myths when it comes to financing a new property. Whether you are looking to purchase a starter home, a vacation home, or your dream retirement property, I hope these answers help you as you tackle some important questions.

Can I Use My 401k as a Down Payment For a House?

Yes, you can absolutely use your 401k, or a portion of it, for your down payment on a home. However, before doing so, you may want to consider the following:

  • How close are you to retirement? If you are retiring soon, it may not be wise to use funds on a new mortgage. Speak to your financial advisor about your retirement goals to see if using your 401k as a down payment works for you.
  • Will you be able to replace the cash before retirement? If not, will you still be able to have a comfortable retirement? If yes, check to see if there are any withdrawal penalties associated with your account so you can understand the true cost of using your 401k to pay for a down payment. 
  • Will you be taxed upon taking the funds out of your 401k? Depending on your 401K, you may have to pay taxes on any money you withdraw, which could substantially increase your tax burden.
  • Are you willing to “borrow” from your retirement — i.e., take a loan from your 401k? You can see what Investopedia has to say about this here.

Whether you should borrow from your retirement savings will depend on a variety of factors. As always, when faced with a difficult financial decision, I recommend that you speak to a trusted financial advisor. She will be able to help you determine the impact using your 401k as a down payment may have. 

I Am Retired — Should I Buy a Home?

It may be scary to think about buying a home once you have left the workforce. However, plenty of happy Floridians have made the leap and purchased a new property after saying goodbye to their careers. For one, purchasing a home after retiring can help you “right-size” your life. You can find a home that has just the amount of space you want or a place that does not require yard maintenance so you can relax. If you already have a property, you can choose to sell it as you are looking for your new home, or you can consider renting it. If you are downsizing, the former may allow you to buy a new, smaller home outright or to reduce your new mortgage payment. If you are unsure about the impact this could have on you, speak to a financial professional.

I Have Filed for Bankruptcy, Can I Still Apply for a Mortgage?

Poor marks on your credit report may make it more difficult to secure a mortgage. While it is not impossible to purchase a home after a bankruptcy or with a low credit score, it is certainly more expensive to do so since your mortgage interest rate will likely be higher. A bankruptcy will show up on your credit report for up to ten years. After filing a bankruptcy, be sure to focus on repairing your credit so you can begin to show potential lenders that you have learned from past mistakes and are ready for more responsibility.

Is It Better to Offer a Larger Down Payment?

Your down payment should be dependent on your own financial situation. A larger down payment will reduce your monthly mortgage payment and the amount of interest you will pay over the life of your mortgage loan. If you opt for a down payment that is less than 20% of the purchase price of the property, you may need to pay private mortgage insurance (PMI). To learn more about how putting down more (or less) on a home can impact your finances, speak to a trusted advisor. 

Can I Buy a Home Even Though I Have Student Loans?

Of course! Student loans are practically a fact of life for most college graduates. While debt can impact one’s ability to borrow, it does not completely negate it. If you are able to comfortably manage both your student loan payment and a mortgage payment, then yes, you can purchase a home.

If you have student loans, the biggest fact to consider when looking to buy a home is your debt to income ratio. If you are able to comfortably make your student loan payments, pay a mortgage and other home costs, and save, you will likely be approved for a mortgage. If your debt to income ratio is high — meaning that most of your income must go toward paying debt — you may find it more difficult to secure a mortgage.

Speak to a mortgage professional to learn more about the impact that student loans or other debt can have on your ability to take out a mortgage. 

Can I Buy a Second Home While Still Paying Off the Mortgage on My First?

Yes, if you are able to show your mortgage lender that you are financially able to maintain two mortgages and the expenses of two different properties, you can purchase a second home while still paying off your first.

However, you may want to pay off your first mortgage if you are able to reduce the amount of interest you will need to pay over the life of your loan. 

How Soon After I Buy a Home Can I Refinance?

With mortgage rates rising, many buyers may be hoping to refinance in the future to secure a lower interest rate. However, it is not a good idea to bank on this. While you can legally refinance very soon after purchasing a home, there are associated fees that might not make it worthwhile.

Have additional questions about home financing? Contact me and let’s discuss your real estate needs.