Moneyfilter: Withdraw from my 401K for my downpayment?

June 12, 2009 8:10 PM

Is it a bad idea to use money withdrawn from a IRA for buying a house? I want to buy a home but I'm having trouble with the down payment and closing costs and I've got a 401K that's just kinda sitting there from my last job.

I've found a older house on the market for about $45K, It needs some work done but I didnt see anything that jumped out at me as being show stoppers. I work and make a decent salary, Not quite 40K a year. My big problem is my savings amount to about $1500 in the bank and thats not enough for the 3.5% down I need or the closing costs which are estimated to be in the $3-5K range currently. My credit score is good enough to do the whole 203K loan otherwise according to my agent.

I have $31K in a 401K I cant access unless I transfer it to an IRA due to the 401K being from my previous employer, Yeah I'm dumb and should have done something about it 8 months ago when I left.

Anon because I dont want to share info about my worth with the world under my name. Throw away email [e-mail].

posted by anonymous to work & money (6 comments total)

I did this. I withdrew from my Roth to cover the 10K I needed for closing costs (Philly has insane closing costs.) I otherwise make enough to cover my mortgage payments, home improvements, etc.

I also have a 401k-type account through my job, so I didn't totally tap out my retirement savings. Even so, it's probably not what a conservative financial advisor would have told me to do, but I also have no intention of selling, so the most important thing for me was to just get into the house. If you're looking to flip, you're putting yourself in a more precarious position.
posted by desuetude at 8:49 PM on June 12

Sure, pull the $5000 you need for closing costs, this is one of the uses that doesn't get hit with the 10% early-withdrawal penalty:

"One other exception to the penalty is for when you are buying a home (having not owned one for at least two years prior) and you have never used IRA money for this purpose before. The exemption is basically meant for first-time home buyers and under it, you may use up to $10,000 of the money you have in your IRA. You can only do this once in your lifetime."

Sucks to rent; get that house!
posted by @troy at 9:43 PM on June 12

Another option you might investigate is taking a loan from your 401k. A quick glance at the topic via google search shows mixed opinions, but it can't hurt to find out if your employer offers it and what the terms are.

But you'll have to balance the decision to buy against a declining market, and make sure you understand all the costs of owning a home: property tax, insurance, lawn care, homeowners associations (sound like it may not apply). With only 1.5k in the bank, you may wind up in a situation where you owe monthly mortgage payments, rent and repair costs because you've scheduled repairs as you earn income, rather than as fast as they can be completed.

That said, $45k for a house sounds low to me. The way to benchmark home ownership isn't against your income, but against rent prices. Around here, you can't throw a rock without hitting a "for rent" sign. If you haven't price shopped for renting, again, more information can't hurt.
posted by pwnguin at 10:07 PM on June 12

I don't know where you live or what rents are like or what your reasons for buying a house are, let alone your age or other details. But I think it's a bad idea, UNLESS you specifically added extra money to your retirement savings for this purpose. If you're buying a house, you should be in a position where you have six months of expenses (incl mortgage) in the bank and at least 5%, if not much more, for a down payment, and where your retirement savings is at a decent level. You haven't said anything about other debt or obligations, but the lack of these key assets suggests that you may need to work at financial stability, especially since it seems like you live in a market where rents are presumably low, given the cost of this house. And, if it's an older house, you may find that you need to spend money on maintenance. (Get an inspection done as one of your subjects.)
posted by acoutu at 10:14 PM on June 12 [1 favorite]

Another option you might investigate is taking a loan from your 401k.

can't take a loan from a dead 401K.

If you're buying a house, you should be in a position where you have six months of expenses (incl mortgage) in the bank and at least 5%, if not much more, for a down payment

He has 5% down, it's in his tax-deferred IRA. Pulling $5000 out of $30000 isn't going to kill it, though I do agree that he should focus on getting that money back into the IRA through annual contributions (say $1000/yr for the next 5 years).

I don't know where the market is going but following your advice is what kept me out of the market 2000-2001 when I moved back to the states. In retrospect, the hands-down smartest thing I could have done was done a stated-income zero-down I/O loan in 2000-2001, back when prices were still depressed (prices in my area are still double now and will not go back down to pre-bubble prices unless interest rates skyrocket and stick there for a long time).

Now, prices aren't rising like they were 2000-2001 but $45K doesn't sound like much a risk for rentable real estate -- we're talking ~$200/mo carrying cost here. I'd just pull the trigger and start being a homeowner.

The advice to get the house inspected was wise but he wasn't asking advice on how to buy a house.
posted by @troy at 10:30 PM on June 12

[This is a followup from the asker.]

I'm 29, The $1500 in the bank is about three months worth of rent for the place I'm in now.

If you google 20916065 on Zillow in Tucson AZ you'll find the place I'm looking at.

I cant get a loan against my 401K as its frozen at my last employer, the only thing I can do is transfer it to an IRA at this point in time.

I dont have family I can get the money from and I dont think I'd have any friends who are in good enough financial standing to give me $5K either.

I'd pay the money back into the IRA as soon as possible, Definitely within 5 years.

My debt amounts to a single credit card I'm in the process of paying off, I owe about $1200 on it still, I've always paid more than the monthly and never missed a payment.

Not a lot of lawn care needed Tucson Arizona, The house was built in 1960 and there is no HOA for it.

I've got no plans to flip the house, I want a home of my own where I dont have to listen to the neighbors kid bash on their piano at 3AM and wake me up, A home where strange smells dont come out of the bedroom at random times unless I create them.

I'm not afraid of getting my hands dirty or hard work, If I was I'd be looking at the $100K houses outside town that are new and trying to find a way to afford them. I feel this place is well within my means.

posted by cortex at 8:09 AM on June 13