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Retirement Plan 401(k)

What happens if I take out a loan on My 401(k) Affect My Mortgage?

A 401(k) loan doesn’t affect the mortgage terms.
By Matt Ryan Webber
Updated August 11, 2022
Facts checked by Amanda Jackson

If you’re looking to access some of the money that you’ve accumulated in your 401(k), you can use a short-term loan which you repay using money from your paychecks. The borrowing option out of your 401(k) is often the best option to access funds than using higher interest loans like the title loans, payday loans, or even personal loans.

If you’re considering a 401(k) loan, you may be wondering how it might impact your other debts, such as your mortgage. The short answer: It isn’t. Whether you are qualifying for a mortgage or paying one down or not, your 401(k) won’t affect other debts.

We’ll explain what 401(k) loans work and detail pros and cons to consider.
Key Takeaways

An 401(k) loan can provide an opportunity to access your account’s money to provide short-term liquidity.
401(k) loans also have no impact on your mortgage, whether it’s your current mortgage or one that you are seeking.
It is possible to use the 401(k) loan for a variety of purposes including an down payment on the purchase of a house.
Try to repay your 401(k) loan quickly. The longer you wait to repay the loan the more you’ll lose out on the benefits of compound interest.

401(k) Loans and Mortgages

An 401(k) loan has both positives and negatives to be considered. If you use it wisely, it can be a simple method to get funds to pay for the costs of a short-term project. However, taking money out of your retirement account can affect the worth of the portfolio. The longer your money is not being invested, the more you miss the benefits of compound interest.

An 401(k) loan has interest that is credited to your account, however it does not involve a lender or a review the credit report. Under the law, you are able to get a loan up to one of $50,000, or greater of either $10,000 or 50 percent of the account value.1

Receiving the loan via your 401(k) will not be taxable unless the loan limits and repayment rules are violated. The loan will not impact your credit rating and no effect to your current mortgage. It won’t affect the rates and terms of your current mortgage nor play a role in your application for a new mortgage.2

In fact, you can take out the 401(k) loan to use as a down payment to purchase the purchase of a home.

401(k) loans will not influence your mortgage. They let you access some of your retirement savings for short-term needs. The only requirement is to pay back the loan if you want to preserve your tax benefits and avoid penalties.
401(k) loans and Real Estate

It is possible to take advantage of a 401(k) loan to finance the purchase of real property. Actually, the guidelines regarding 401(k) loans are different in the case of a loan to purchase a home.

The norm is for 401(k) loans to be paid back on an amortized schedule or with an agreed-upon repayment schedule, in regular installments, over less than five years. However, if it is the case that the loan is used to buy an primary home, the repayment time could be extended. Your plan administrator determines the conditions for how long.2

However, it is not likely to make sense to make use of a 401(k) loan to completely finance a residential purchase as, in the majority of cases, a regular mortgage loan will offer greater financial benefits. First, you are unable to take interest from 401(k) loans as you can with mortgage interest payments. In addition, borrowing money out of your 401(k) for a period of time long enough to pay off a house could significantly decrease the value of your portfolio in the long term.

Another way that an 401(k) loan can play an important role in the purchase of real estate is if you use the funds to pay for the closing or down payment expenses. Because the 401(k) loan isn’t technically an obligation–you’re taking out your own funds in the end–it doesn’t have any effect on either your debt-to-income ratio or credit score, which are important factors lenders take into consideration.
What happens if I take out the loan from my 401(k) impact my mortgage?

The 401(k) loan will not influence your mortgage application. It is not a factor in your mortgage application. 401(k) loan has no influence on your debt-to income ratio or your credit score, two big factors that influence mortgage lenders. In fact, some home buyers make use of 401(k) loan funds as an option to pay for a down payment on their home.
Are 401(k) loans a good idea?

An 401(k) loan has upsides and disadvantages that you should consider. Whether it’s a good idea for you will depend on many factors about your personal financial situation. These loans can provide a good source of cash at a low cost for urgent needs. However, they could reduce the value of your retirement portfolio if you don’t make timely payments.
Can I make use of an 401(k) loan for a down payment?

You can use a 401(k) loan for a down amount, and this will not affect your debt-to-income ratio. Just make sure that you are able to pay off your 401(k) account promptly. The longer it takes you to pay back your loan the more likely you’ll lose out on the benefits of compound interest.
The Bottom Line

In some instances, the 401(k) loan can be an effective way to get access to short-term liquidity. 401(k) loans also have no effect on your mortgage. In fact, getting a 401(k) loan can be an effective way to raise a down payment for the purchase of a house. Keep in mind that one of the drawbacks of the loans is that they drain money from your investment and you be left out of the benefits of compounding until you have to repay the loan.
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