Can You Borrow From Your 401(k) to Buy a House?

You can borrow from your 401(k) to buy a house if your plan allows loans, and federal law caps the amount at $50,000 or half your vested balance, whichever is less. Loans used to purchase a primary residence qualify for a repayment period longer than the standard five years, and because you’re paying interest to your own retirement account, the money stays in your name. That doesn’t make it free. Lost investment growth, double-taxed interest, and a large tax bill if you leave your job before repaying can turn a convenient down payment source into an expensive one.

How Much You Can Borrow

Section 72(p) of the Internal Revenue Code treats a plan loan as a taxable distribution unless it stays within specific limits.¹ Your loan cannot exceed the lesser of $50,000 or the greater of half your vested account balance or $10,000.²

The $10,000 floor is optional. Plans are not required to include it, so a participant with a small balance should confirm their plan document before assuming they can borrow more than half.²

The $50,000 ceiling also carries a lookback reduction. The statute reduces it by the difference between your highest outstanding loan balance during the prior 12 months and your current balance on the day of the new loan. If you had a $20,000 balance six months ago that you’ve since paid down to $5,000, the reduction is $15,000, and your effective cap becomes $35,000.¹ The rule stops participants from cycling in and out of the full $50,000 repeatedly.

Federal law does not restrict you to one loan at a time. You can have multiple loans outstanding as long as the combined balances stay within the dollar caps.³ Your plan can be stricter. The Summary Plan Description can set lower borrowing limits, restrict the number of active loans, or prohibit loans altogether.⁴ Confirm your plan’s rules before you count on this money for a purchase.

Repayment Terms for a Home Purchase

Standard 401(k) loans must be repaid within five years, with substantially level payments made at least quarterly.⁵ A loan used to buy your primary residence is exempt from that deadline.⁶ The statute sets no specific maximum; your plan picks the term. Many plans offer 10, 15, or 25 years, which keeps the monthly payment manageable alongside a new mortgage.

The extension applies only to the home you’ll actually live in. Vacation homes, rentals, and second residences do not qualify and fall back under the five-year rule. Repayment happens through payroll deduction on the same schedule as any other plan loan.⁵

The Department of Labor requires plans to charge a reasonable interest rate, meaning something comparable to what a commercial lender would charge for a similar loan. Most plans set the rate at the prime rate plus one or two percentage points. Your plan document has the exact formula. The interest goes back into your own account, but it is paid with after-tax dollars, and it will be taxed again as ordinary income when you withdraw it in retirement. That portion of your repayment gets taxed twice.

How to Request the Loan

Most plan administrators run the application through an online portal. For a housing-related loan you’ll usually need to provide:

A signed purchase agreement or real estate contract showing the address and price
Your current vested balance from a recent statement or the plan dashboard
The specific amount you need for the down payment, closing costs, or both, within the IRS limits

On the form, select the primary residence option so the extended repayment terms apply. If approved, you sign a promissory note that sets the interest rate, payment schedule, and term. Funds usually arrive by direct deposit or check within five to ten business days. Administrators may charge a one-time origination fee and sometimes a small ongoing maintenance fee deducted from your account.⁷ Ask what those look like before you finalize.

One boundary worth flagging: if your plan offers annuity-style payout options such as a joint-and-survivor annuity, your spouse may need to consent in writing for loans above $5,000. Most 401(k) plans are structured as profit-sharing plans without an annuity option, so no spousal signature is required regardless of the amount.² Your plan administrator can tell you which category applies.

Will It Hurt Your Mortgage Application

Under Fannie Mae’s underwriting guidelines, which govern most conventional mortgages, repayment of a loan secured by retirement account funds is specifically excluded from your debt-to-income ratio. The Selling Guide classifies it as an obligation that “will not be included as a debt” in DTI calculations.⁸ Your 401(k) loan payment will not reduce the mortgage amount you can qualify for on a conventional loan.

The borrowed amount does lower your account balance, though. If the lender is looking at your retirement savings as part of your financial reserves, a smaller balance can work against you. FHA, VA, and portfolio lenders operate outside the Fannie Mae framework and can apply their own rules, so ask your loan officer how they’ll treat the debt.

What It Costs You Long-Term

The largest cost is investment growth you don’t earn. While the borrowed money is out of the account, it is not compounding at market rates. If your investments would have averaged 7% to 8% and your loan rate is around 7.75%, you are roughly breaking even at best, and you’re giving up years of compounding on money you’ll need decades from now. The longer the repayment period, the bigger the drag.

The double taxation on interest compounds the cost. You repay from a paycheck that has already been taxed, and those same dollars are taxed again as ordinary income when you withdraw them in retirement. The original principal was pre-tax money that would have been taxed once on withdrawal anyway; the extra bite falls on the interest.

Some borrowers also cut their regular 401(k) contributions during repayment because the payroll deductions feel too heavy, or because the plan requires it. Reducing contributions means missing employer matching funds and further compounding. Across the years remaining before retirement, that can add up to tens of thousands of dollars.

What Happens If You Leave Your Job

If you quit, get laid off, or retire while a loan balance is still outstanding, the plan typically deducts the remaining balance from your account. That deduction is called a qualified plan loan offset, or QPLO, and it is treated as an actual distribution.⁹

A QPLO is eligible for rollover, so you can avoid the tax hit by depositing the offset amount into an IRA or another eligible retirement plan. Under a provision from the Tax Cuts and Jobs Act, you have until the due date of your federal tax return, including extensions, for the year the offset occurs.⁹ A six-month extension typically pushes that to October 15 of the following year.

Miss the deadline and the offset is taxed as ordinary income. If you’re under 59½, a 10% early distribution penalty applies on top of that.¹⁰ On a $40,000 balance, that combined bill can land somewhere around $9,600 to $13,600 depending on your bracket.

What Happens If You Miss Payments While Still Employed

Falling behind on payments while you’re still working triggers a different consequence. The unpaid balance is treated as a deemed distribution. The plan may allow a grace period through the end of the calendar quarter following the quarter of the missed payment, but if you don’t catch up, the full outstanding amount becomes taxable.⁵

A deemed distribution is taxed as ordinary income, plus the 10% early distribution penalty if you’re under 59½.¹¹ Unlike a plan loan offset, a deemed distribution is not eligible for rollover.⁵ You cannot undo the tax hit by moving the money into an IRA later. Staying current on payments matters even more than it might seem.

Hardship Withdrawal as a Fallback

If your plan doesn’t offer loans or the loan limits don’t cover what you need, a hardship withdrawal is another path. The IRS treats costs directly related to purchasing an employee’s principal residence, excluding mortgage payments, as an immediate and heavy financial need that can support a hardship distribution.¹²

The trade-offs are steeper than a loan. A hardship withdrawal is permanent; you cannot repay it into the plan or roll it over to an IRA.¹² The full amount is taxed as ordinary income in the year of the withdrawal, and if you’re under 59½, the 10% additional tax applies.¹⁰ You don’t have to take a plan loan first to qualify.

One point of confusion worth clearing up: the penalty-free first-time homebuyer exception of up to $10,000 under Section 72(t)(2)(F) applies only to IRAs, not to 401(k) plans.¹⁰ A 401(k) hardship withdrawal for a home purchase carries the full penalty for anyone under 59½.

1
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
2
Internal Revenue Service. Retirement Topics – Loans
3
Internal Revenue Service. Issue Snapshot – Borrowing Limits for Participants With Multiple Plan Loans
4
Internal Revenue Service. Hardships, Early Withdrawals and Loans
5
Internal Revenue Service. Retirement Plans FAQs Regarding Loans
6
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
7
U.S. Department of Labor. A Look at 401(k) Plan Fees
8
Fannie Mae. General Information on Liabilities
9
Internal Revenue Service. Plan Loan Offsets
10
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
11
Internal Revenue Service. Considering a Loan From Your 401(k) Plan?
12
Internal Revenue Service. Retirement Topics – Hardship Distributions