Bad neighborhood, 4-year-old son, 50 mile commute, Old 401K. Any way to buy?

March 22, 2012 2:11 PM

I currently live in a shady neighborhood on the South Side of Chicago. I call the police at least once a week. I also have a 50 mile commute through the city. We want to move closer to my work sooner rather than later. After almost 2 years of unemployment that wiped us out financially, we're back on our feet, but savings is in rough shape. I have a 401k from my previous employer with about 30K in it, and I'm wondering if there is any sensible way to use the money in the 401k as a down payment so that we can buy, rather than rent. Making payments won't be a problem, just the down payment. We intend to stay in the new place for many years, and I really, really hate moving, so I'd rather not move this year into a rental, and then do it again in a year or two.
posted by Morydd to work & money (9 answers total)

If this is a first-time residence (first in five years for legal purposes) you can borrow from your 401(k). It's a good way to access the money without paying early distribution penalties though this is also an (expensive) option. Ask HR if it's allowed at your company as many, but not all, plans have it. Here's a simple overview of it: http://www.401khelpcenter.com/loans.html

If the loan doesn't pan out and your choice ends up being between early withdrawal and renting a year, keep in mind that if you rent a year, you could spend what you would have paid in penalties to hire some capable young persons to move your heavy things from your apartment to your new house.
posted by michaelh at 2:18 PM on March 22, 2012

You should be able to use your 401K for the purchase of a new home without penalty. If you can access your 401K servicer's website, it will outline when and how you can do this, otherwise give them a call. Also try contacting some banks to talk to a mortgage rep, and they can talk you through it. When I was purchasing my home, I remember the bank asking if we wanted to use my 401K as part of our down payment. YMMV, of course.

It seems do-able, but you need to see what financial requirements any mortgage lending agency will have for you. Don't be afraid to talk to a reputable bank or lender. It may be time consuming, but it is at least an informative process.
posted by jabberjaw at 2:18 PM on March 22, 2012

It is possible, but it might not be a good idea to cash out your 401(k). The economy is starting to recover, and you wont have any retirement money set aside anymore. Even though you hate moving every few years, that might be the best thing to do.
posted by twblalock at 2:48 PM on March 22, 2012

If you are a first time homebuyer, you might want to consider a first time homebuyer loan. To start, check out the Illinois Housing Development Authority. I bought my first home in Maryland via a state program and paid only $2k in downpayment. A friend bought his first in Wisconsin with a similar downpayment. Not sure as to Illinois, but it'd be worth asking around, doing some Googling, etc.
posted by letahl at 2:55 PM on March 22, 2012

You say you can afford the payments, but not the down payment. You should figure out why that is. That suggests that there is no margin in your budget for saving a down payment, nor is there margin for an emergency fund. If you cannot afford a down payment, you can't afford a house. Owning a house is one of those things where every once in a while, you have to pay a very large pile of money very quickly to keep your house habitable. If you can't afford a down payment now, then you can't afford to maintain a house and deal with the occasional expenses of owning a home. The payment isn't nearly the entirety of the cost of owning a house.

Now, I might just be reading to much into your question and you might have a very sensible plan. However, you're not convincing me that you have a sensible plan here.
posted by saeculorum at 3:00 PM on March 22, 2012 [7 favorites]

This bothers me quite a bit.

It used to be that people had reasonable expectations and got reasonable advice from financial institutions about buying homes, but that was back when the banks had something to lose. In the past decade, most of the traditional guidance homebuyers got was tossed out the window, by those hawking mortgages with nothing to lose and a commission on the deal. You should ponder those words. We were seeing weirdness even back when we bought our house, but I went with my much more conservative figures and I've never regretted it.

A house is a big expense, but is only one part of it all. You'll need a lawnmower that first summer, a snowblower the first winter, a new furnace the second winter, and a new roof a few years in. Or something like that. Houses are great big money pits.

I suggest you look very carefully at your financial situation. Good, solid traditional mortgage advice is that you should put a minimum of 20% down on a house and that no more than one third of your gross income should go towards the mortgage. The specifics have varied a little over the years, but this is solid guidance.

Now, of course a fifty mile commute through Chicago sucks. It's clearly expensive, too. However, you should really consider the benefits of tightening your belt, building up a downpayment, and making sure that you don't end up as one of those statistics we're seeing so many of. If you can build up the downpayment fairly quickly, you're probably going to be able to handle the mortgage and other expenses. If you cannot, your current thinking has you losing out on your RETIREMENT SAVINGS. So you hate moving. Box everything up and move twice anyways. Don't unpack anything but the bare essentials.
posted by jgreco at 6:37 PM on March 22, 2012 [2 favorites]

I have a Roth IRA, which is similar to a 401K plan, so some of the things that I encountered may apply to you.

When I withdrew money from my Roth IRA to put towards a down payment on my house, I was still employed at the same company that provided my Roth. According to my Roth company, the term for this type of withdrawal is called a "hardship withdrawal," which basically meant that I could withdraw under the age of 59 1/2 without any penalties.

The withdrawal process was fairly painless and just involved filling out a couple of forms and faxing a monthly statement to my lender. However there were some unexpected gotchas that weren't even mentioned in the fine print of my Roth IRA's policy.

Firstly, even though they advertised "no penalty fees" they still charged a service fee, a deposit fee for processing the withdrawal, and a fee for not being with my Roth IRA provider for more than 5 years. The fees added up to about $300, which isn't much, but it still sucked seeing that money disappear. The fees were a percentage of the total dollar amount I was withdrawing, so they could potentially be much higher in your case.

Second, the maximum dollar amount my policy would allow me to withdraw from my Roth IRA account was $10,000. I had less than $10,000 in my account, so it wasn't a problem for me, but I could see how that could be a problem for you since you have $40K in your account. I would definitely check with you 401K provider to see if they have a maximum withdrawal limit. I have a feeling they do.

Thirdly, I was only allowed to withdraw money that I had contributed to my Roth IRA account. I was not allow to withdraw any of the money that my employer had contributed through price-matching. I was still employed with my company at the time of my withdrawal, so this might not be an issue for if you are no longer with your company. However, I would double-check just in case.

So, before you dive into using your 401K money, I suggest you call up your provider and ask as many questions as possible. Especially ask about withdrawal limits. Given that the purpose of a 401K or Roth IRA plan is save up for retirement, I doubt that your provider will allow you withdraw all or most of your savings for a down payment on a house.
posted by nikkorizz at 6:55 PM on March 22, 2012

Additionally, since you have a 401K plan, any amount you withdraw will be taxed. Make sure that the taxes are taken out of the total amount you withdraw, otherwise the taxes will be deferred until tax time next year. You don't want to be stuck with a huge tax bill, especially if you have very little savings as you say.
posted by nikkorizz at 7:11 PM on March 22, 2012

I agree with what saeculorum says above about the full costs of owning your own place.

Maybe consider whether renting (presumably in a new place) and saving for a few years now that you have a salary coming in might actually work out better in the long run? Borrowing from your 401k will make a big hit on the growth of your retirement assets that you might come to regret one day (particularly since the market's doing so well this year -- compare 1 yr returns of 7-12% on various indices to record low bank loan rates to see what you'd be losing out on in real terms by borrowing from retirement instead being able to just have a mortgage).

Additionally, since you have a 401K plan, any amount you withdraw will be taxed.

Not sure this is true, as the OP is discussing borrowing from a 401k, not taking early distribution (IRS site here, last few paragraphs at bottom), though you have to borrow less than 50% of the 401k bal or less than $50k whichever is less, and pay it back in 5 years, it looks like, for it to be non-taxable).

But as someone above said, be sure to read all fine print from your employer, the plan manager, and the IRS about 401k borrowing before making your decision.

(Usual disclaimers apply: Not a professional financial adviser, nor have I borrowed from my own plan, though I am a home-owner contemplating serious fixer-upper expenses.)
posted by aught at 7:43 AM on March 23, 2012