First Time Home Buyer 401(k) Loan: Is It Worth the Cost?

You have a down payment goal that seems out of reach and a retirement balance that's building with every paycheck. The gap between those two numbers is where a lot of first-time buyers get stuck, and if you've started wondering whether the money sitting in your 401(k) could get you into a house, you're almost certainly doing the math anyone in your position would do.

Among first-time buyers in the past year, 26% pulled from financial assets like a 401(k), stocks, an IRA, or cryptocurrency to help fund their down payment, while 59% leaned on savings and 22% got a gift or loan from family.[1] [2]

A 401(k) loan, a 401(k) withdrawal, and an IRA withdrawal are three different things with three very different price tags. People use "take out," "pull," "tap," "cash out," and "borrow against" to mean all of them at once, and that's exactly how buyers end up making the most expensive version of a move they thought was the cheapest way to reach their goal. Once you understand the difference between these three options, the rest of your choices get much clearer.

A loan, a withdrawal, and an IRA are three different things

If you spend an evening reading through big threads on this topic, you'll notice something odd. Some people calling it a terrible idea and others saying it worked out fine for them are arguing about completely different things. One group is talking about cashing out a 401(k) and eating the taxes and penalty. The other is talking about borrowing against it and paying themselves back. They talk past each other for hundreds of comments because nobody names which one they mean.

Here are the three paths and what each one costs.

The hierarchy here is close to unanimous among people who do this for a living: a loan beats a withdrawal almost every time. Even the skeptics who don't love any version of this call the loan the less bad option. A repaid loan keeps your money invested and costs you a manageable amount, while a withdrawal hands a chunk of your retirement to the IRS and takes it out of the market for good.

The bigger question isn't which of the three to use. It's whether any of them beats the alternatives, because for most buyers who land here, a lower-down-payment loan or a down payment assistance program is the cheaper path.

How much do you actually need for a down payment?

Before you consider touching your retirement accounts, check the size of the wall you're really trying to clear. The 20%-down figure is stubborn, and it talks a lot of buyers into thinking they need far more cash than they do.

The median down payment for first-time buyers was 10% in 2025, the highest since 1989 but still half of the 20% everyone quotes.[1] First-time buyers now make up just 21% of the market, a record low, and the typical first-time buyer is 40 years old, a record high, which tells you how hard the down payment has gotten to assemble.

The typical U.S. home was worth about $371,774 in July 2026.[3] Using a round $400,000 as a benchmark and carrying it through the rest of this article, 10% down is $40,000, and 3.5% down on an FHA loan is $14,000. Those are very different mountains, and the smaller one may not require raiding any additional accounts. Rates factor in too: the 30-year fixed averaged 6.67% as of August 13, 2026.[4]

The reason people chase 20% is to avoid private mortgage insurance, or PMI, the premium you pay on a conventional loan when you put down less than 20%. According to the Urban Institute's Housing Finance Policy Center, PMI generally runs 0.46% to 1.5% of the loan amount per year, with your credit score doing most of the work in determining where you land. On a $360,000 loan, that's roughly $1,656 to $5,400 a year, or about $138 to $450 a month.

Chris Kuclo, a senior director at Best Interest Financial, says a buyer with around a 650 credit score and a debt-to-income ratio above 40% should "expect probably $160 to $170 for every loan amount of $100,000." That's the higher end, tied to a weaker credit profile and current as of Q2 2026, so treat it as a ceiling rather than a default. The takeaway is that PMI is a monthly cost, not a wall, and on a conventional loan it disappears once you build enough equity.

Whatever you use for a down payment, your lender will trace where it came from. Kuclo's advice is to keep it clean: "Avoid multiple crazy cash deposits into the account, keep your documentation as simple as possible. There's going to be a lot of documentation around where your assets are coming from for the transaction." A tidy paper trail now saves you a scramble at closing.

The IRS rules, and the myth that trips everyone up

Here's the single most important correction on this whole topic: the $10,000 penalty-free first-time-buyer exception is IRA-only. A 401(k) has no home-purchase penalty exception. A loan or a hardship distribution are the only two ways into 401(k) money, and neither one is the $10,000 exception people think they're getting. This is the most-upvoted piece of misinformation across the big threads, so if you take one thing from this section, take that.

For an IRA, the IRS lets a first-time buyer take up to $10,000 over their lifetime without the 10% early-withdrawal penalty.[5] Income tax still applies to traditional IRA funds and to the earnings portion of a Roth, so "penalty-free" is not the same as "tax-free."

The definition of a first-time buyer matters. For the IRA exception, you count as a first-time buyer if you had no ownership interest in a principal residence during the two-year period ending on the date you acquire the new home.[6] If you're married, the lookback applies to both you and your spouse. The three-year figure you may have seen elsewhere is real, but it's HUD's definition of a first-time buyer for FHA and many down payment assistance programs, a different rule for a different purpose.

The reason plan specifics matter so much is that no general article governs your money. Your plan document does. Adam Smith, a mortgage broker at CORE Finance Group, makes the point directly: "Your retirement has very specific terms of withdrawal that you need to at least get a copy of. You need to know how your retirement portfolio is performing. If you don't know how much money your money is making, you can't make educated decisions about whether or not it makes sense to use it or to leave it." Pull your plan document and your latest statement before you decide anything. That's step zero.

You may have also seen talk of a federal proposal to open 401(k)s for home purchases. A bill called the Home Savings Act (H.R. 7185) was introduced in the House in January 2026 and would allow penalty-free 401(k) withdrawals for a down payment or closing costs.[7] It is not law. It was referred to the House Ways and Means Committee, where it remains, with no Senate companion, and the President said he opposed the idea.[8] Changing the current rules would take an act of Congress, since the tax code, not an executive order, decides which withdrawals are penalty-free. As of August 2026, nothing in current law has changed, and the $10,000 exception still applies only to IRAs.

Using a 401(k): loan vs. hardship withdrawal

If a 401(k) is the account you're looking at, you have two doors, and they don't lead to the same place.

The 401(k) loan

You can borrow the lesser of 50% of your vested balance or $50,000.[9] Note vested: any employer match that hasn't vested yet isn't part of what you can borrow, so the number in your portal may overstate it. If you have more than one 401(k), you can generally borrow against each.

Repayment terms usually run five years, but a statutory exception allows a longer term when the loan is used to buy your primary residence, which is your situation. The interest you pay goes back into your own account, but the loan isn't free. A 401(k) loan is required to carry a reasonable interest rate, commonly around the prime rate plus one point (with prime at 6.75% as of August 2026, that's roughly 7.75%). Repayment typically comes straight out of your paycheck, there's no credit check and no application, and the money is usually available within about 10 business days.

What happens if you leave your job?

This is the part a lot of advice gets wrong. If you leave your employer with a loan still outstanding, the unpaid balance is treated as a loan offset, and you have until your tax-filing deadline for that year, including extensions, to repay or roll over that amount before it becomes taxable.[10] It is not "immediately due."

That said, a window is not the same as safety. If you can't come up with the balance by that deadline, it converts to a taxable distribution plus a 10% penalty, and if you left your job without another one lined up, it hits at the worst possible time, right after you've lost the income you were counting on to repay it.

Does a 401(k) loan hurt your mortgage approval or DTI?

No, and this is where a lot of buyers get bad information. A 401(k) loan payment generally is not counted in your debt-to-income ratio (DTI, the share of your monthly gross income that goes to debt payments) for Fannie Mae, Freddie Mac, FHA, VA, or USDA financing, and the loan generally isn't reported to the credit bureaus.[11] The reason is simple: you're borrowing against your own asset, so it isn't a debt to an outside creditor in an underwriter's eyes.

The loan or withdrawal proceeds still have to be sourced and documented, and some lenders apply their own stricter overlays. The safe move is to tell your loan officer before you take the money, not after. If you want to see how DTI shapes what you qualify for, our guide to how much house you can afford walks through it.

The hardship withdrawal

A hardship distribution is limited to the amount of your immediate and heavy financial need, which can include the taxes the distribution itself generates. You'll owe income tax plus a 10% penalty if you're under 59½, and the money can't be repaid or rolled back into the plan.[12] Your employer decides whether your need qualifies, and qualifying on a home purchase is quite hard.

On nearly every dimension, a hardship withdrawal is worse than a loan. If a loan is available to you, take that instead.

Using an IRA: traditional and Roth

The IRA path is where a lot of the cheapest money lives.

Traditional IRA

You can take up to $10,000 over your lifetime, penalty-free, under the first-home exception. Income tax still applies.[5] At a 22% federal rate, a $10,000 withdrawal nets you roughly $7,800 before any state tax.

Roth IRA

This is the one worth reading slowly, because the order of operations is what makes it powerful. Your contributions (the money you put in) come out anytime, tax- and penalty-free, with no first-home exception needed and no dollar cap. You've already paid tax on them.

Beyond that, up to $10,000 of your earnings can come out penalty-free under the first-home exception. For those earnings to also be tax-free, the account needs to be at least five years old, and the funds have to be used within 120 days of the withdrawal.[13] For a lot of first-time buyers, a Roth is the least expensive money on the table, and they never realize it, because every other article treats the IRA as a $10,000 footnote.

Rolling a 401(k) into an IRA

Because the $10,000 exception is an IRA feature, rolling old 401(k) money into an IRA can make it eligible. Handle this carefully. It generally applies to funds from a former employer's plan; in-service withdrawals from your current plan are limited; and depending on how the transfer is executed, it can trigger tax consequences of its own. Verify with your plan administrator before you move a dollar. This also takes time to set up, so if it's on your list, look at it early rather than two weeks before closing.

Here's how the four paths compare side by side.

The real cost, with the math shown

The scary numbers that float around this topic tend to be unreproducible, so here's every assumption stated up front and the arithmetic you can run yourself.

The example follows a common profile: 31 years old, $100,000 in a 401(k), you want $15,000 for a down payment, and you're 30 years from retirement. Assume an 8% loan rate (roughly the prime rate of 6.75% plus one point, rounded up slightly), a 60-month term, and a 10% average annual return on the account.

Scenario 1: You borrow and repay on schedule

Your monthly payment is about $304, and you repay roughly $18,250 total, of which about $3,250 is interest that goes back into your own account. Left untouched, that $15,000 would have grown to about $24,160 over five years at 10%. Rebuilt through your monthly repayments at the same return, the account lands around $23,550. The five-year gap is about $600. Projected forward the remaining 25 years to retirement at 10%, that gap is roughly $6,560 less at the end.

That's the real headline, and it's more useful than the frightening one: a repaid 401(k) loan costs real money, but it costs thousands, not hundreds of thousands. The size of the cost depends on the spread between your loan rate and your account's return. If your loan rate is 8% and the account returns 7%, a repaid loan can come out slightly ahead. If the market returns 10% or more, you lose ground. Think of it as a spread, not a verdict.

Scenario 2: You don't repay it

You change jobs, can't cover the offset, and the $15,000 becomes a taxable distribution plus the 10% penalty, gone from the account for good. At 10% over 30 years, that same $15,000 would have grown to about $261,700 by retirement. That figure is the full future value of money that never goes back in, which is a different thing from the incremental cost of borrowing and repaying in Scenario 1. A common mistake blurs those two together and produces a scary six-figure number nobody can reproduce. They're not the same, and the difference is the whole point.

Scenario 3: You take a straight cash withdrawal

Say you request $15,000 from a 401(k) distribution that's eligible for rollover and have it paid to you. The plan must withhold 20% for federal taxes up front, so only $12,000 lands in your account even though you asked for $15,000.[10]  At a 22% federal rate you owe $3,300 in income tax plus a $1,500 penalty, $4,800 in all, which means another $1,800 due at filing on top of what was already withheld. Net, you keep about $10,200 of a $15,000 request, roughly 68 cents on the dollar, and less once state income tax is in the mix. And the balance you see when you log into your account isn't the cash you'll have at closing: vesting, withholding, and plan limits all shrink it, and buyers routinely learn that too late.

To put those losses in context, the median 401(k) balance is $44,115, the average is $167,970, and for savers under 25 the median is just $2,234.[14] Meanwhile, Americans say they'll need $1.46 million to retire comfortably.[15] Money you pull today is money that isn't compounding toward that number.

When it makes sense, and when it doesn't

There's no universal answer here, because the variables make the decision, not a slogan. Run your situation through these five questions before you decide.

1. Is it a loan or a withdrawal? 

This is always the first question. A repaid loan is defensible in the right circumstances; a straight withdrawal almost never is. If you're looking at a withdrawal, treat that as a strong signal to look harder at any alternatives.

2. Does it get you across the 20% mark? 

This is the one case even the skeptics tend to endorse, and it's worth running the real numbers, because sometimes the math doesn't hold up. 

Take a $450,000 home with 17% down, carrying about $175 a month in PMI. Borrowing the remaining $13,500 gap from a 401(k) at a below-market 4% over five years costs about $249 a month, more than the $175 in PMI it eliminates, month for month. At a realistic 401(k) rate near 8%, the payment climbs to about $272, so the gap only widens. Either way, the claim that PMI savings will cover the loan payment is simply wrong.

The stronger argument is the longer-horizon one. At 17% down on that house, normal amortization gets you to 80% loan-to-value in roughly 38 months at a 6.67% rate, so you'd pay around $6,650 in PMI on the way there anyway. Crossing 20% up front skips that, lowers your loan amount, and may improve your rate. Just keep in mind that PMI on a conventional loan isn't permanent: you can request cancellation at 80% LTV, and it terminates automatically at 78%.[16] So "eliminate PMI forever" oversells the upside. The real benefit is skipping a few years of it and possibly landing a better loan.

3. How secure is your job? 

The loan-offset risk is the whole downside case. If a layoff is plausible in the next five years, that changes the answer, because you could be forced to repay or eat the tax and penalty right when your income disappears.

4. How many years to retirement?

A 31-year-old and a 55-year-old are running completely different math. Fewer compounding years left means less time to recover the gap, so the same loan costs the older buyer far more in the end.

5. What's your rent-vs-own gap in your market?

This is where waiting has its own price. Kuclo notes that "having a loan with PMI is not the worst thing in the world because you got the house. The expensive part is getting the house. It's less expensive to refinance down the road into a better loan program. Start with the loan that works for you. Then you work towards the loan that would be the most ideal."

There's a counter-position worth taking seriously, because it shows up constantly and it isn't wrong: if you can't save a down payment, maybe you can't afford the house. That's a real signal about your monthly budget and your emergency fund, and it deserves a check. Where it breaks down is that plenty of buyers can comfortably carry a monthly payment while a 10% down payment on a $400,000 home is flatly out of reach on a normal savings timeline. Carrying a mortgage and assembling $40,000 in cash are two different tests, and passing one doesn't mean failing the other.

Smith offers a way to pressure-test the decision against your own account. The way he frames it: if your retirement money is performing well, leave it alone; if it isn't, weigh what real estate is likely to appreciate against what your account is really earning, and ask your plan manager why the returns are low. That's his view rather than a blanket recommendation, and it's most useful paired with the reproducible math above, not as a shortcut around it.

If most of your answers lean "no," the alternatives section below is where you should be spending your energy.

Questions to ask your 401(k) plan administrator

Plan rules vary more than most buyers expect, and your own plan document is the only thing that governs what you can do. Ten minutes on the phone answers most of it. Bring this list:

• Does my plan allow loans, and what's the maximum term for a primary-residence loan? Some plans don't offer loans at all.
• What interest rate applies? It's usually around prime plus a point, and it goes back into your account.
• Am I fully vested, and what's my vested balance? Any unvested employer match isn't borrowable.
• What happens to the loan if I leave? Ask whether repayment continues by ACH or converts to an offset.
• Does my plan offer hardship distributions for a home purchase, and what documentation is required? Qualifying is often harder than people assume.
• Can I keep contributing while I repay a loan, and does the employer match continue? Losing the match while you repay is a hidden cost.
• How long does disbursement take, from request to money in hand? This one matters more than it looks; it's the difference between a smooth closing and a two-week scramble.

Lower-cost options to try first

These paths get you into a home without touching retirement money, and they're worth exhausting first. For most readers who land here, this is where the decision should end.

Low-down-payment loans

• FHA loans: 3.5% down with a 580 credit score (10% down for scores of 500 to 579). You'll pay an upfront mortgage insurance premium of 1.75% and an annual premium that's typically around 0.55%. FHA mortgage insurance lasts the life of the loan if you put down less than 10%, and 11 years if you put down 10% or more. That's a real cost to weigh against conventional PMI, which cancels automatically once you reach 22% equity. For 2026, the FHA loan limit for a one-unit home runs from a floor of $541,287 (65% of the $832,750 conforming loan limit) to a ceiling of $1,249,125, depending on your county.[17] [18]
• VA loans: Eligible service members, veterans, and surviving spouses typically need no down payment. There's a VA funding fee on first use of 2.15% with nothing down, dropping to 1.5% with 5% to 10% down and 1.25% with 10% or more down. That fee may be waived depending on disability status.[19]
• USDA loans: The Section 502 Guaranteed program offers 0% down for eligible low- and moderate-income buyers in eligible rural areas.[20] It's zero down for those who qualify, not merely a low down payment.

Down payment assistance and grants

• HUD's Good Neighbor Next Door offers 50% off the list price on eligible HUD-owned homes in designated revitalization areas for full-time law enforcement officers, pre-K–12 teachers, firefighters, and EMTs. You put down as little as $100 with FHA financing and commit to living there for three years.[21]
• Your state's housing finance agency is the single most overlooked resource here. Nearly every state runs down payment assistance, grants, or below-market loans for first-time buyers, and buyers routinely stack several of these to assemble a down payment they couldn't save on their own. Start there before you look at your 401(k).

A negotiating angle most buyers miss: a seller can't put money toward your down payment, but a seller concession applied as a principal reduction gets you to a similar place through a different door. As Smith explains it: "Bear in mind a seller can't contribute to your down payment, but a seller can contribute to a principal reduction. It's kind of a roundabout way of accomplishing the same task." A concession applied that way lowers your loan amount and your loan-to-value ratio, which is what more money down would do anyway.

Gift funds are common and fully allowed. About 22% of first-time buyers used a gift or loan from family toward their purchase.[1] Your lender will want a documented gift letter, so start that conversation early too.

What to do next

First, pull your 401(k) plan document and your most recent statement, so you know your vested balance, your plan's loan rules, and how your money is performing.

Second, call your lender before you move any money, so the funds get sourced and documented correctly and you don't withdraw the wrong amount.

Third, check your state housing finance agency's programs, because the cheapest path to a down payment is often one you didn't know existed.

A top-rated agent can point you toward lenders and programs built for a low down payment, and toward the assistance you might qualify for before you ever consider your retirement account. If you'd like help finding one, Clever matches you with vetted local agents at no cost to you.

The feeling that got you here, that the down payment is the one wall between you and a home, is real. The good news is that for most buyers, the wall is shorter than it looks, and there's usually a cheaper way over it than the retirement account you've spent years building.

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