Home Buying in 95405>Question Details

Romenjou, Home Buyer in Santa Rosa, CA

we want to use some of our 401k $ for down payment, we are first time buyers in our 50's. good idea?

Asked by Romenjou, Santa Rosa, CA Wed Aug 10, 2011

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I disagree. With any financial decision the answer is: It depends. Are you going to use a substantial amount of your 401K, or just a little? What other investments/retirement plans do you have in place? Are you buying in a market that demonstrated stability and a recovering trend already, or is the market still in decline?

You need to speak with a financial advisor - not a Realtor about this. Real estate investments should always be considered within the context of a whole picture financial assessment. There is no one right answer to any financial question. What is right for me could be a disaster for you.

Good luck to you!
2 votes Thank Flag Link Wed Aug 10, 2011
Come on, folks. It's a terrible idea. There's a penalty for early withdrawal, and it's taxed as ordinary income. See http://taxes.about.com/od/retirementtaxes/a/early_penalty.htm Or http://www.401khelpcenter.com/401k_education/hardship_withdr… Or just do a search on 401k withdrawals. You're instantly reducing your available funds by 10%-40%. That's why I suggested Remenjou consult with an accountant--so the qualified person could enumerate the drawbacks.

On top of that--and, again, verify with an accountant--while there are ways to use a self-directed IRA to invest in real estate, you cannot--absolutely cannot--do that for a primary residence. So, perhaps,even if the 401k, upon leaving a company, might be somehow convertable into an IRA, it still couldn't be used for a primary residence.

Further, you really can't use it as a downpayment even on an investment property. Check with the people who manage self-directed IRAs. You can buy all cash (from a self-directed IRA). And there's one IRA manager I know of that arranges pools of money, so that a group of people can each put less than the total purchase price into a property--but then they (or actually, the way it's structured) or their LLCs each own a portion of the investment property. But you can't have any sort of recourse loan attached to a self-directed IRA investment.

Tip: You can invest in options. So you could option some properties and if they go up in value, you sell the options and the money returns to your self-directed IRA. That'd be one way to invest in real estate if you didn't have enough for an all-out purchase. Do an online search for "self-directed IRAs." There are at least 4 or 5 good companies out there, and most have lots of information online.

And I disgree with the advice that "you're the only person who can make that decision." Well, you could make that decision, but it'd be (with all due respect) an uninformed and ill-advised decision.

And we won't even get into the "what ifs" regarding real estate in the next 10 years. You're in your 50s. You're probably anticipating retiring in 5-10 years. Now, that is something of a spread. But if it's 5 years, ask most any real estate agent: "In even a stable market, would it be a good idea to invest money in real estate if I plan on selling in 5 years?" That's kind of "iffy" even in a decent market. In today's market, not too many agents will say it's a good idea to buy now, knowing that you're going to be selling in 5 years.

Anyhow, please, please talk to an accountant and a financial planner before you do anything.

Hope that helps.
1 vote Thank Flag Link Wed Aug 10, 2011
Don Tepper, Real Estate Pro in Burke, VA
MVP'08
Contact
No.

Check with your accountant for the reasons why it's not a good idea.
1 vote Thank Flag Link Wed Aug 10, 2011
Don Tepper, Real Estate Pro in Burke, VA
MVP'08
Contact
Hello Romenjou, you can withdraw from a 401k without penalty to buy a home. You may qualify FHA with as low as .5% half percent down payment but with a slightly higher interest rate so if you can qualify to buy with the 3.5% down FHA you can get a lower rate in the 3's.

If you figure out what cities/zip codes you are considering, minimum number of bedrooms and the maximum payment/price you are looking to achieve and you can be emailed listings to fit your search criteria.

You may qualify FHA from fico scores between 500-579 with 10% down or minimum 580 fico score may qualify FHA 3.5% down or as low as .5% half percent down payment program. You may consider 3% down conventional from a minimum 620 fico score or even 5% down conventional with NO Mortgage insurance (Lender paid MI).

You will need to be pre-approved to be able to meet an agent to view and submit offers on any homes of your choice. Your qualifications will be determined by your credit profile, debt to income ratios, fico scores, loan program and how much you want to invest into the down payment and closing costs.

It only takes a few dozen questions to qualify, go over your options and email you listings to study and compare. Here are some links to study as well as web reference links to many loan program pages offered...

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0 votes Thank Flag Link Sat May 9, 2015
To clarify my earlier post on this subject. I believe it to be a smart decision to borrow against a 401k to be able to make a home purchase as borrowing against the 401k avoids the penalties in most cases. A young couple I worked with just closed on their first home purchase last week and were able to do so because of borrowing against a 401k. They have enough income to support the payback on the mortgage and the 401k. They would not have been able to become home owners without using this approach.

Leon Geisberg, EcoGreen Realtor
DRE License #01111523
Creative Property Services / Avalar
707-522-1375 phone 707-484-7384 cell 707-228-1554 efax
Leon.GreenHomes@gmail.com
Search for your dream home at http://www.SonomaGreenHomes.net
0 votes Thank Flag Link Sun Jun 30, 2013
It's best to discuss such questions with your accountant as your realtor doesn't have the ability to advise your financial long range plans. All investments carry risk as seen by the downturn of the economy over the last few years, and hopefully was a lesson to us all to not speculate unless you have the assets to work with. But I'm always available to help you do some "window shopping" while you do your homework and talk to your accountant and mortgage broker!
Terry Bell, Realtor
Sonoma County Real Estate
CPS Real Estate
707-292-5712
0 votes Thank Flag Link Sat Jun 29, 2013
Yes, using your 401k for a down payment makes a lot of sense. You'll enjoy great tax savings and enjoyed pride of ownership. In our area, prices bottomed out 8 months ago, so you are still able to buy at low prices and with historically low interest rates.
0 votes Thank Flag Link Fri Mar 8, 2013
I think that's what Ruth and Perry just suggested.
0 votes Thank Flag Link Sun Aug 14, 2011
If you are thinking of taking money out of your 401k, don't. There are tax consequences plus you will lock in any recent losses you have suffered in the crazy real estate market. A better option is to take a loan against your 401k. Then you will be paying back the interest to yourself!
Web Reference: http://christinamacuska.com
0 votes Thank Flag Link Sun Aug 14, 2011
Actually you can borrow from your 401k unto a certain limit without incurring any Tax penalties.
One does that to put a down payment.

Actually, one can then pay it back with interest, but the interest is being paid to yourself.

If you are looking to take money out without paying it back, it comes down to
How much is the 401k plan worth and do understand the Tax liabilities.

Smart thing to do would be to borrow against it and pay it back.

Also you may want to pursue Pledged Asset loans.

Good luck.
Perry

http://www.ruthandperry.com
0 votes Thank Flag Link Sun Aug 14, 2011
Keep your stock. Talk to a lender
0 votes Thank Flag Link Fri Aug 12, 2011
Before using your 401K, which we never recommend, check your state for 1st time home buyers' incentives. There may be a grant program to help with your downpayment.
0 votes Thank Flag Link Wed Aug 10, 2011
Thank God for Don Tepper.....he is completely correct. taking money out of your future income today and paying hefty taxes on it for your first home is not a wise decision! Saving $$ for a home is possible, maybe adjusting the amount you are putting into your 401K to put some aside for you home in the next year or 2 if it takes that long to save. You need to Budget, live off of beans and rice and write the goal down on paper! Don't put all your wise decisions at risk by pulling the money out early!
Here is a blog on budgeting
http://blog.house-guy.com/2011/01/26/living-within-your-budget/
or how to save 20% down
http://blog.house-guy.com/2011/04/15/20-down-payment-on-your-home/

you can do it!!!
0 votes Thank Flag Link Wed Aug 10, 2011
I think this is a great idea! This is the best time to invest and real estate is the best long term investment you can do. Try buying investment property upto 4 units. If this is your first home you can buy FHA 3.5% Remember the more down payment the higher your net profit on your rentals.
0 votes Thank Flag Link Wed Aug 10, 2011
ditto..ditto..ditto...Talk to your people.
Congrats! This is exactly the right time to be asking this question.
0 votes Thank Flag Link Wed Aug 10, 2011
I agree with everyone except Dan.
You probably want to Leverage as much as you can.
You are way ahead of most people; talk to a Financial Planner.
0 votes Thank Flag Link Wed Aug 10, 2011
I think you've already gotten the idea that it might or might not be a good idea and you should get professional advice. There is no possible way to know from a 21 word question.

Must admit though that it's hard to come up with many scenarios in which it would be a good idea.
0 votes Thank Flag Link Wed Aug 10, 2011
I agree with Steve that you should seek counsel from a financial planner or tax expert. As a lender, I can provide expertise on the how's and what if's of the mortgage process and provide you clear numbers on payments, costs, etc. However, I am licensed or certified to answer any questions about the actual ramifications of withdrawing from your retirement funds. I have seen articles that strongly advocate for and against, but encourage you to seek professional advice on YOUR situation. Be sure to discuss the pros and cons of borrowing against your retirement funds instead of liquidating them also. It is help the financial planner if your get the specifics on your employers 401K loan process before you meet with him/her.

Best of luck to you!
0 votes Thank Flag Link Wed Aug 10, 2011
Romenjou:

You are the only person who can answer this question with guidance from a financial/tax advisor. Do not trivialize the importance of obtaining guidance in this respect.

While this is a Real Estate related question, to make an INFORMED decision every individual detail of your current financial situation (personal savings, retirement savings, health, job status, target retirement date, etc...) needs to be reviewed against your proposed home purchase.

You can find a local Financial Planner via The National Association of Personal Financial Advisors website http://www.napfa.org/ The Financial Planner you find will likely be able to refer you to a tax advisor if they do not possess this background. If not, I would seek out an IRS Enrolled Agent (See http://www.irs.gov/taxpros/agents/article/0,,id=100710,00.html )

A preliminary option would be to obtain a True Pre-Approval from a Mortgage Broker to answer the “What’s financially possible” question. If you are comfortable with the answer, you can then take the steps above before fully committing yourself to the idea of home ownership.You can read more about the Pre-Approval process here: http://www.Steven-Anthony.com/GettingStarted

Best, Steve
0 votes Thank Flag Link Wed Aug 10, 2011
You can definetley do that and I have had many clients do the same. Just make sure you speak to your financial advisor about it first. The most money to be made in real estate is in a down market such as now and eventually your purchase has the potential to double in value and that gain will minimize any loss or penalty you might have from pulling your money out. Happy house hunting :)
0 votes Thank Flag Link Wed Aug 10, 2011
As for taking cash out of your 401k for a real estate purchase, please be sure to check the penalties you will pay (partially based on your age) and compare those to your borrowing costs. Good luck!
All the best, 
Heather

Heather Young
DRE# 01885386
(707) 478-4537

Frank Howard Allen Realtors
460 Mission Blvd
Santa Rosa, CA. 95409

Real estate information deemed reliable but is not guaranteed.
0 votes Thank Flag Link Wed Aug 10, 2011
Nothing is ever as simple as it seems. You should definitely be talking to your accounting and tax professional about the best approach. You didn't mention if you were in a position to borrow against your 401K rather than taking a withdrawl. That's probably what I would start with as a superior approach. You keep your 401K intact, avoid paying penalties, and avoid paying the higher mortgage costs that PMI would entail.
0 votes Thank Flag Link Wed Aug 10, 2011
It could be a great idea! Don't be discouraged from checking it out with your tax advisor. As long as real estate is an approved choice for your 401k plan, diversifying into real estate (along with a healthy mix of equity and fixed income, i.e. stocks and bonds) makes a lot of sense for a lot of people. Especially here in Santa Rosa, CA where real estate prices are relatively low now, but overall economic prospects for the future are good. Hope this helps!
All the best, 
Heather

Heather Young, MBA
DRE# 01885386
(707) 478-4537

Frank Howard Allen Realtors
460 Mission Blvd
Santa Rosa, CA. 95409

Real estate information deemed reliable but is not guaranteed.
0 votes Thank Flag Link Wed Aug 10, 2011
Hi There Romenjou,
Have you ever considered using a small downpayment program such as FHA financing to make it easier to hang on to your cash? Lots of options out there right now, and remember just because you use a large down payment doesnt always mean it will help you in the long or short run. Hope this was helpful... let me klnow if you have ANY other questions and I would be happy to answer them.
0 votes Thank Flag Link Wed Aug 10, 2011
omg!

There really is nothing else to express.
0 votes Thank Flag Link Wed Aug 10, 2011
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