401k Home Purchase Loan

March 22, 2023 2:19 PM

401k loans allow for longer payback timelines when the funds are used to purchase a home. Instead of 60 months (5 years), it can be as long as 30 years. When the cost to close is less than the maximum amount you can borrow, are you restricted to the loan deposit amount, the total cost to close amount, or the normal limit of half your funds up to $50,000 total?

Imaginary numbers...

If your 401k has $150,000 in it, you can usually borrow $50,000 from it using the normal rule of half the dollar amount or $50,000, whichever is less.

If you are buying a home, and the down payment is $20,000, and the total cost to close is $40,000, and you want to take a 401k home purchase loan with a maturation date beyond the normal 60 month limit, what is the total amount you can borrow?

• the normal limit, $50,000, still applies
• the total cost to close, $40,000
• the loan deposit only, $20,000

posted by Number Used Once to Work & Money (7 answers total)

This is entirely up to your plan administrator to determine. There's nothing inherent in 401k loans that requires a 5 year timeline for any particular loan, or a 30 year timeline for home purchases. Plans do not need to offer loans at all, and if they do, they can cap them at any amount that's less than or equal to $50K.

We are not able to answer your question; this is strictly a question for your 401(k) plan administrator.
posted by saeculorum at 3:30 PM on March 22, 2023

Best answer: Actually there are IRS rules about the maximum loan amount and repayment schedule. It is up to the plan administer to decide what types of loans if any will be offered and so the plan administrator will be one to determine (within IRS guidelines) whether the closing costs are a legitimate use of funds for "purchasing a primary residence". I would guess yes since the closing statement doesn't match certain expenses to certain funding sources but it doesn't really matter what I think - only what the plan administrator thinks.

While you are talking to them, make sure you understand these additional concerns
(1) what happens if you no longer work for the employer - normally this means the entire amount comes due fairly quickly or it is treated as a plan distribution and subject to both income tax and the penalty) and
(2) if all contributions, employer as well as your own, are suspended until the loan is repaid. Note that this means that if you take a 30 year loan, you will not be able to use your 401k to save for retirement nor get the benefit of employer matching for the whole 30 years, a big draw on your retirement savings plan.
posted by metahawk at 3:42 PM on March 22, 2023

Response by poster: > the plan administrator will be one to determine (within IRS guidelines) whether the closing costs are a legitimate use of funds for "purchasing a primary residence".

Can you provide a link to or summary of the IRS guidelines?

Google hasn't been helpful in that regard.
posted by Number Used Once at 4:16 PM on March 22, 2023

Best answer: Here is a link to the general topic of 401k loans.

Here is a reference to where to find out more: A loan that is taken for the purpose of purchasing the employee’s principal residence may be able to be paid back over a period of more than 5 years.
(IRC Section 72(p)(2)(B)(ii); Reg. § 1.72(p)-1, Q&A-5,-6, -7, and -8)

And here is the referenced section (I searched for IRC 72(p)(2)(b) site:irs.gov to find it)
posted by metahawk at 5:22 PM on March 22, 2023

Best answer: You might also want to follow up the reference cited here to find out more how the loan gets linked to purchase:

What tracing rules apply in determining whether a loan qualifies as a principal residence plan loan?

A-7: The tracing rules established under section 163(h)(3)(B) apply in determining whether a loan is treated as for the acquisition of a principal residence in order to qualify as a principal residence plan loan.
posted by metahawk at 5:24 PM on March 22, 2023

One other thing to remember about 401k loans for home purchases, spoken as a person who has done it twice in my life, that doesn't directly relate to your question but may or may not be of interest if you end up taking out said loan.

Generally (and this is another thing on the list to check with your plan admin to make sure about how it works for your particular plan), because of the nature of the funds, the only kind of early repayment of a 401k loan that is allowed is a full payoff.

You can't, for instance, double your payments one month or make an extra payment or something (like you might with a regular debt) because you have a little extra cash that month - the entire loan amount is either repaid according to the agreed-upon schedule or it is all repaid at one time.
posted by pdb at 9:16 PM on March 22, 2023 [1 favorite]

Best answer: I found Cornell's site easier to navigate when I tracked down 163(h)(3)(B):

https://www.law.cornell.edu/uscode/text/26/163#h_3
posted by Number Used Once at 7:04 PM on March 27, 2023