You've found the home of your dreams.

There's just one thing standing between you and your new house: The down payment.

Many home buyers opt to use funds from their employer’s 401(K) program to come up with the down payment on a house.  There are two avenues for accessing 401k funds.

Ordinarily, you can't take money from your 401(K) plan unless you retire, leave the company or become disabled, but some company plans permit certain “hardship withdrawals” when there is an immediate and heavy financial need, that includes the purchase of an employee's principal residence.

The drawback to a hardship withdrawal is that you will pay taxes and penalties on the amount withdrawn from your plan, which often must be paid in the year of withdrawal. And while hardship withdrawals are allowed by law, your employer is not required to provide them in your plan. Check with your employer’s human resources department if you're not sure if your 401(K) plan allows hardship withdrawal.

The second approach can be to borrow against your 401(K) – sometimes as much as 50 percent of your account balance can be accessed. You pay interest on the loan, but the interest goes back into your account. The money you receive is not taxable as long it is paid back and plans provide you anywhere from five to 30 years to pay back your loan.

However, borrowing from your 401(K) is not without risk. If you lose your job or leave your employer, generally you must pay back the loan in full within a short period, sometimes as little as 60 days. If the money is not paid back in that time, it is considered a withdrawal from your plan and subjected to the same taxes and penalties. While 401(K) accounts can usually be rolled over into a new employer’s 401(K) without penalties, loans from a 401(K) cannot be rolled over. 

In addition, because the funds withdrawn from your account are no longer earning compound interest, your account will be smaller when you retire. And you’ll be using after-tax money to repay pretax money. So this is not an approach to be taken lightly.

In addition, some lenders count the money borrowed from your 401(K) as additional debt along with your car payments, student loans and credit card payments. It may seem a bit unfair since you are borrowing your own money, but many lenders view it as a payment obligation that affects your debt-to-income ratio in qualifying for a home loan. It may be a factor in whether you decide to make a hardship withdrawal from your 401(K) and pay tax penalties or borrow against it.

Utilizing 401(K) funds in the purchase of a home is another facet of your home purchase which requires an additional level of education and counsel.  It is another reason to search out a mortgage planner who's abilities and knowledge will help you to determine the best approach for your individual needs and circumstances.