Using your 401(k) for a down payment

Most plans offer two routes to the money: a loan or a withdrawal. Some plans allow only one, and the rules come from your plan and federal tax law, so start by asking your plan administrator what yours permits.

• 401(k) loan: you borrow from yourself and repay with interest
• Withdrawal: you take the money out for good, usually with taxes owed

Many plans let you borrow up to $50,000 or half of your vested balance, whichever is less. Repayment usually comes out of each paycheck over a set number of years, and the interest goes back into your own account.

Because it's a loan and not income, it generally isn't taxed as long as you stay on schedule. Some plans allow a longer repayment term when the loan is for a primary home.

Some plans allow a hardship withdrawal for buying a primary home. The amount is usually taxed as ordinary income in the year you take it, and if you're under 59½, a 10% early-withdrawal penalty may apply on top.

That means you may need to withdraw more than your down payment to cover the tax bill. A tax professional can estimate what you'd keep.

Lenders want to see where your down payment came from. Expect to show the plan statement and the paperwork for the loan or withdrawal.

Whether a 401(k) loan payment counts in your debt-to-income ratio depends on the loan program, so ask your loan consultant early. It can change how much house you qualify for.

Money taken out of the market stops growing. Even a loan you repay in full can cost you years of compound growth.

A job change matters too. If you leave or lose your job, many plans want the loan repaid quickly. Anything left unpaid can be treated as a withdrawal, with taxes and possibly the penalty.

• A gift from a family member, with a signed gift letter
• Down payment assistance programs in your area
• A smaller down payment, if the extra mortgage insurance costs less than the 401(k) trade-off
• Waiting a few months to save more