401(k) Loan for Down Payment: How It Works and the Risks

Yes, you can borrow from your 401(k) to buy a house if your plan offers loans, and many plans do. A 401(k) loan for a down payment lets you borrow up to the lesser of $50,000 or 50% of your vested balance. You repay it with interest, for example through payroll deduction, and the loan isn’t taxed as long as you repay on schedule. The main risk is your job: if you leave or lose it, the unpaid balance can become a taxable distribution.

How a 401(k) loan for a down payment works

A 401(k) loan comes from your own account balance. According to the IRS retirement plan loan FAQs, plans may offer loans but aren’t required to. So first, ask your plan administrator whether loans are available and what limits apply.

How much you can borrow

IRS rules cap a plan loan at the lesser of $50,000 or 50% of your vested balance. One exception lets a plan lend up to $10,000 even when half your balance is less, although plans don’t have to offer it. The $50,000 cap also shrinks if you had another plan loan in the past 12 months. Plans can also set lower limits.

Say your vested balance is $80,000. Half is $40,000, so that’s your maximum. At $140,000, half would be $70,000, so the $50,000 cap applies.

Repayment, interest and term

Payments must be roughly equal, include principal and interest, and be made at least quarterly. Your plan sets the interest rate and how you repay, for example through payroll deduction.

You generally must repay a plan loan within five years. However, the IRS allows a longer term for a loan used to buy your principal residence, if your plan permits it. If you miss payments, the IRS treats the unpaid loan as a distribution.

What happens to a 401(k) loan if you leave your job

Leaving your employer is the biggest risk. A plan may require full repayment when you leave. If you don’t repay, the plan offsets (reduces) your account by the unpaid amount, and that offset counts as a distribution.

You can still avoid the tax by rolling over the offset amount. That means depositing the same amount of your own cash into an IRA or another eligible plan. If you left the job or the plan ended, the deadline is your federal tax return due date for that year, including extensions.

Otherwise, the offset is taxable income, plus the 10% additional tax if you’re under 59½ and no exception applies. Say you leave with $25,000 still owed. You’d need $25,000 in cash by your tax deadline, soon after spending your savings on a house.

How mortgage lenders treat a 401(k) loan for down payment

Fannie Mae accepts money borrowed against your own 401(k) for the down payment, closing costs and reserves (Selling Guide B3-4.3-15). Lenders also check your debt-to-income ratio (DTI), the share of gross monthly income that goes to debt payments.

Under Fannie Mae Selling Guide B3-6-05, a loan secured by your own financial assets is a contingent liability. The lender can leave its payment out of DTI if it has the loan document showing your account as collateral. As a result, most lenders leave it out on conventional loans. Some add stricter rules (overlays), and other loan programs have their own guidelines. Our debt-to-income ratio guide explains the math.

Reserves are the savings left after closing. If you count the same 401(k) toward reserves, the lender subtracts the loan amount and fees from the balance. A $100,000 balance with a $30,000 loan counts as $70,000 before other adjustments.

Expect to provide the 401(k) loan agreement and bank statements showing the money moving into your account. Fannie Mae treats a deposit over 50% of your total monthly qualifying income as a large deposit that the lender must document.

Take the 401(k) loan before closing and tell your loan officer early

Tell your loan officer at preapproval that you plan to use a 401(k) loan, so they can request the right documents early. Then ask your administrator how long disbursement takes, and request the loan in time for the funds to arrive before closing. A loan taken in the final days can trigger a new underwriting review and delay closing.

A 401(k) loan for closing costs works the same way, as long as it’s documented. Check how much closing costs are before you set the amount, and borrow only what you need.

The true cost of a 401(k) loan for a home purchase

Hypothetical example: a $30,000 401(k) loan at an example plan rate of 8.0%, fixed, repaid monthly, with no plan fees. Your plan’s rate and fees may differ.

The interest is only part of the cost. The larger costs are lost growth and a smaller paycheck.

First, the $30,000 isn’t invested while it’s out of the account. Whatever growth it would have earned is lost, and the gap is larger if markets rise during the loan.

Second, the loan payment shrinks your take-home pay just as your mortgage payment starts. That mortgage payment depends on current rates. Freddie Mac’s Primary Mortgage Market Survey put the average 30-year fixed rate at 7.11% on November 12, 2026, up from 6.24% a year earlier.

A 10-year term lowers the payment. However, it roughly doubles the interest in this example and keeps the money out of the market longer.

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

The IRS hardship rules list costs directly related to buying your principal residence, excluding mortgage payments, as a qualifying need. Plans don’t have to offer them, and the amount is limited to what you need, which can include the resulting taxes.

A hardship withdrawal is taxable income unless it comes from Roth contributions. If you’re under 59½, the 10% additional tax may also apply. The first-time homebuyer exception won’t help, because the IRS exceptions table limits it to IRAs. You also can’t repay a hardship withdrawal or roll it over.

This hypothetical example applies an example 22% federal rate to the whole withdrawal and leaves out state income tax:

• To net $30,000 before age 59½, you’d withdraw about $44,118. That covers $9,706 in federal income tax and $4,412 in additional tax.
• At age 59½ or older, with no additional tax, you’d withdraw about $38,462.

Your actual tax depends on your full return. Before you choose any option, confirm the tax effect with a tax professional and your plan’s rules with the plan administrator.

401(k) loan vs. hardship withdrawal vs. IRA first-home withdrawal

IRA first-time homebuyer withdrawal rules

IRAs don’t make loans. In fact, IRS Publication 590-B lists borrowing from a traditional IRA as a prohibited transaction. Instead, IRAs offer a first-time homebuyer exception for withdrawals.

The $10,000 penalty exception

You can withdraw up to $10,000 over your lifetime for a first home without the 10% additional tax. The limit applies per person, so a married couple can each use it if both qualify. Still, the withdrawal is taxable income unless it comes from Roth IRA contributions or is a qualified Roth distribution.

You’re a first-time homebuyer if you had no present interest in a main home during the two years before the date of acquisition. That’s usually the date you sign a binding purchase contract. If you’re married, your spouse must meet the same test. The money can also help your or your spouse’s child, grandchild, parent or other ancestor buy a first home.

The 120-day rules

You must spend the money on qualified acquisition costs, including closing costs, within 120 days of receiving it. If the purchase is canceled or delayed, you can generally redeposit it in an IRA within 120 days of the distribution. The IRS treats that as a rollover. A separate 60-day rule covers ordinary rollovers.

Roth IRA withdrawals

Roth IRA contributions come out first, and the IRS doesn’t count them as income. Earnings are tax-free only in a qualified distribution. That requires the five-year period since your first Roth contribution year to have passed, plus a qualifying reason such as a first home (within the $10,000 limit) or age 59½. Converted amounts have their own five-year periods.

When a 401(k) loan for down payment makes sense

A 401(k) loan fits best when your job is stable and you can repay it within five years without straining your budget. It also helps when the extra cash gets you to a cost threshold, such as 20% down on a conventional loan.

Say a buyer is purchasing a $400,000 home with $60,000 saved, or 15% down. A $20,000 401(k) loan would raise the down payment to $80,000, or 20%. Fannie Mae requires mortgage insurance on conventional loans above 80% loan-to-value, so this buyer would avoid private mortgage insurance (PMI).

It’s a poor fit if your job is uncertain or the loan would drain your emergency savings or required reserves. A gift or assistance program may cover the gap instead.

Alternatives to borrowing from your 401(k)

Gift funds. A relative can give you down payment money that you never repay. You’ll need to document it, so read our guide to down payment gift money first.

Down payment assistance. State and local housing agencies offer grants and second loans to eligible buyers. Compare down payment assistance programs in your area.

A smaller down payment. Fannie Mae’s HomeReady program allows up to 97% loan-to-value on a one-unit principal residence purchase, or 3% down, for eligible buyers. An FHA loan requires at least 3.5% down. Our guides to conventional loan down payments and FHA loan down payments cover the other options. The trade-off is mortgage insurance, so compare what PMI costs with the cost of the loan.

Seller-paid closing costs. A seller can cover part of your closing costs, within limits set by loan type and down payment. See the seller contribution limits for each program.

Steps to use a 401(k) loan for down payment

1. Check your plan’s rules. Ask the administrator about the maximum, rate, repayment method, fees, home purchase term, processing time and what happens if you leave.
2. Get preapproved and tell your loan officer. Say up front that some of your funds will come from a 401(k) loan.
3. Request the loan early. Leave time for the funds to arrive before closing.
4. Keep the paper trail. Save the loan agreement, plan statement and bank statements showing the deposit.
5. Budget for both payments. Add the loan payment to your new mortgage payment, property taxes and insurance.

If this is your first purchase, our first-time home buyer’s guide covers the rest of the process.

Frequently asked questions

Can you borrow from your 401(k) to buy a house?

Yes, if your plan offers loans. IRS rules cap the loan at the lesser of $50,000 or 50% of your vested balance, and your plan can set a lower limit.

Does a 401(k) loan affect getting a mortgage?

Usually it has little effect on DTI. Fannie Mae lets lenders leave the payment out with the loan documents, but the loan lowers the assets counted toward reserves.

Can I use a 401(k) loan for closing costs?

Yes. Fannie Mae accepts funds borrowed against your 401(k) for closing costs as well as the down payment. Your lender will need the loan paperwork and proof the money reached your account.

Is there a penalty for using a 401(k) to buy a first home?

A 401(k) loan repaid on schedule has no tax or penalty. A hardship withdrawal is taxable, and the 10% additional tax may apply under 59½, because the first-time homebuyer exception applies only to IRAs.

Can I borrow from my IRA for a down payment?

No. IRAs don’t make loans, but a first-time homebuyer can withdraw up to $10,000 over their lifetime without the 10% additional tax. The money is still taxable unless it comes from Roth contributions or a qualified Roth distribution.

Start with your plan’s numbers

A 401(k) loan for a down payment works best when your job is secure and you can repay it quickly. Your next step is a call to your plan administrator to learn your loan limit, rate and term. Then compare current mortgage rates and get preapproved, so your loan officer can plan for the 401(k) loan from the start.