Borrowing from a 401(k) for a down payment: limits and risks

How much you can borrow

For the 2026 tax year, the IRS sets the most a plan can permit as the lesser of:

1. The greater of $10,000 or 50 percent of your vested account balance, or
2. $50,000

The IRS gives the example of a participant with a $40,000 balance, who can borrow up to $20,000. Outstanding loans count toward the limit, and plans can set lower maximums. Only the vested part of your balance counts, so recent employer contributions may not be included.

Repayment rules

The general rule is repayment within 5 years, with substantially equal payments of principal and interest made at least quarterly. The IRS says a loan taken to buy your principal residence may be repaid over a longer period. Your plan sets the actual term, so ask what it allows for a home purchase.

Payments typically come out of each paycheck. The interest goes back into your account, but the money you borrowed is out of the market while the loan is outstanding.

Loan versus withdrawal

A withdrawal from a 401(k) before age 59½ is generally taxable and may face the 10 percent additional tax. The first-time homebuyer exception to that additional tax applies to IRAs, not to workplace plans. IRS Topic 558 lists the exceptions for plans other than IRAs, and buying a first home is not among them. That makes a plan loan, or an IRA under its own rules, the more common route for down payment money.

How mortgage lenders may view it

Lenders review where your down payment comes from, so expect to document the loan and the transfer. Whether the loan's payment counts in your debt-to-income ratio depends on the loan program's rules; ask your lender early. Even if it is not counted, the payment reduces your take-home pay, so include it in your own budget.

The job change risk

The biggest risk is leaving your job, voluntarily or not. Many plans require the remaining balance to be repaid or offset when employment ends. If a loan is not repaid according to its terms, it can become a deemed distribution, which may be taxable and subject to the additional tax depending on your age. The IRS loans FAQ explains plan loan offsets and rollover options; read it and your plan's rules before borrowing.

When it makes sense

A plan loan can make sense when your job is stable, the payment fits comfortably, and the amount fills a gap that would otherwise delay the purchase by years. It makes less sense if you might change jobs soon, if the payment would strain your budget alongside a new mortgage, or if it would leave you without an emergency fund.