I wish my employer had offered the Advantage Home Plus Homeownership benefit when I bought my first home. Instead, my brother convinced me to empty my IRA to use it as a down payment. I had no one able to gift me a down payment to buy a house. Instead, I took the penalty to close my IRA in exchange for a down payment. Being young, I reasoned that it was my money and I wasn’t going to retire for years or if ever. Then, between my student loan and car payment, I was always short of money. But as I got older, I realized that if I had kept the money in my 401K, I would have been better off. That seeming insignificant stash of money would have grown and added a little more to my looming retirement.
While there may be ways to use your 401(k) to help fund your down payment, be aware of the risks.
As you may know, if you set up a retirement program, using the 401(k), you can withdraw from it if you have an emergency; for example, you had an accident and were unable to work, or situations that are equally dire. These are known as hardship withdrawals, and they come with a 10% tax penalty.
There’s sometimes also a provision which allows withdrawals to help with the purchase of a home. Rather than taking a hardship withdrawal, you may be able to borrow funds from your 401(k) account with a promise to pay it back. You should contact the firm where your 401K is located to ask if loans are possible and to discuss the penalties for withdrawal and possible problems. So, while it may seem great that you can use funds from your 401(k) to help to buy a home, it doesn’t mean that it is the best financial plan.
There is the risk when you borrow from a 401(k) for a home it may increase the cost of your loan. The costs may rise to a figure much higher than what you borrowed. However, the biggest risk to borrowing against your 401(k) is the one of unforeseen circumstances, such as if you change jobs before repaying the money, you have to repay it within the first two months of leaving.
Maybe You Don’t Need a Giant Down Payment
Conventional wisdom is that a 20% down payment is needed to take out a mortgage. That premise is no longer a reality. You don’t always need to put 20% down to purchase a home.
Within the past few years the Federal government has offered help to encourage home ownership. In the current mortgage market, there are a bevy of low- and no-down payment mortgage options available which make it simpler to purchase a home than during any other period this decade.
The following are a few of the available mortgage assistance programs, with the percentage of down payment required. The income needed to qualify for one of these programs might be higher than you believe. It is always worth a call to inquire if you are eligible for:
- The VA loan (Department of Veterans Affairs) allows 100% financing
- The FHA loan (Federal Housing Administration) allows a 3.5% down payment
- The FHFA, which runs Fannie Mae and Freddie Mac, requires just 5% down payment
- The HomeReady™ program (Fannie Mae) requires just 3% down payment.
- The Conventional 97 loan (Fannie Mae) allows 3% down payment.
- The USDA loan (U.S. Department of Agriculture) allows 0% down payment.
- The Good Neighbor Next Door program (HUD) allows for a $100 down payment
The newest of these low- and no-down payment programs and the most flexible, is the HomeReady™ mortgage. This program allows income from all members who live in a household; and provides below-market mortgage rates to those qualified borrowers. I now know that I would have qualified for this benefit even though I made more money than my peers.
By using this valuable benefit, you may discover that it isn’t necessary for you to borrow from your retirement account, so there isn’t a need to put yourself and your family in a financially tenuous position. When used, this program can save you THOUSANDS of dollars in loan fees. To learn more about how to assemble a down payment for your first home, call us at Advantage Home Plus at 1-800-376-4603 or click GET STARTED to speak with one of our counselors about your financial needs.