The down payment required for a home purchase is the most important barrier to home ownership. Tapping a 401(k) account is a tempting method of meeting the requirement. Alternative approaches include a second mortgage, which is another source of needed funds, and mortgage insurance, which reduces the down payment required.
As an illustration, you want to buy a house for $200,000 and have only $10,000 in cash to put down. Without mortgage insurance, lenders will advance only $160,000 on a first mortgage, leaving you $30,000 short. One possible source of the needed $30,000 is your 401(k) account. A second source is your first mortgage lender, who will add another $30,000 to your first mortgage, provided you purchase mortgage insurance on the total loan of $190,000. A third option is to borrow $30,000 on a second mortgage, from the same lender or from a different lender.
Whether you take funds from a 401(k) to make a down payment should depend on whether the costs and risks of doing so are less unfavorable than the alternatives.
THE 401(K) AS A SOURCE OF DOWN PAYMENT FUNDING