Raising the money for a down payment on a home could be the most challenging step towards homeownership. One way to get the amount you need is to borrow against your 401(k)–although there are numerous options you can consider depending on what’s wise for you at the moment.

But first, what’s the real deal behind borrowing against your 401(k)?

More than 50 percent of 401(k) plans include a loan provision that gives participants the option to borrow against their savings. But is it really advisable to borrow against the balance of your employer-sponsored retirement account to cover your down payment? What are the potential risks to doing so?

In this article, we’ll answer some questions about how you can effectively pull off getting a loan from your 401(k) without future repercussions on your financial health.

Should I borrow against my 401(k)?

Frankly, there are only a few instances in which you should consider taking this kind of loan. It works only if you are a responsible and disciplined borrower–and even then, real estate experts advise considering this option only if you’ve exhausted all your other options.

Still, it can be a wise decision as long as you know what you’re getting into. If it is the most sensible way to start living comfortably in your own home, borrowing against your retirement savings could be worth it.

How does it work?

You can borrow up to half of your 401(k) balance or $50,000, whichever amount is smaller. For example, if your balance is $90,000, you are allowed to borrow up to $45,000.00; but if you have, say, $130,000, you are allowed to borrow $50,000. However, just because you can borrow up to $50,000 doesn’t mean you should. Be wise in deciding how much to borrow, and avoid borrowing more than you really need for your down payment.

Once you’ve taken out the loan, you will then have to repay the amount and its corresponding interest on a monthly or quarterly basis. A typical 401(k) loan must be repaid in five years or less, although a longer repayment period may be approved for those who are borrowing for a down payment for a primary residence.

What are the advantages?

There are a lot of reasons why a lot of home buyers are attracted to the option of borrowing from their 401(k) account. For one, most buyers like the idea of owing themselves money, instead of owing someone else (in this case, banks and financial institutions).

It also possible to receive the money quicker than you could with a traditional loan from a bank, since you won’t need to undergo a credit check in order to get approved. Interest rates are also relatively lower with 401(k) loans. This makes borrowing from yourself the quickest, simplest, and cheapest way to get the cash you need for your down payment. Receiving this loan is also non-taxable unless repayment rules are violated, and it does not affect your credit rating.

The great news is, if you pay back your loan on schedule or in advance, it will have little to no effect on your retirement savings progress.This being so, the impact of a 401(k) loan on the progress of your nest egg can be minimal, neutral or even positive–although the most common scenario is for the cost to be less than that of paying “real interest” on a bank or consumer loan.

What are the risks?

Now that you know the advantages of borrowing against your 401(k), it’s time to learn about the substantial risks that come with it.

If you fail to make payments for three months, the amount you borrowed will be considered a distribution from the account, which the IRS will label as taxable income. A withdrawal penalty of 10% will apply to borrowers who are aged 59 ½ and below. These dangers may be fairly easy to prevent if you have a steady stream of income, but it will be a different case if you have to leave your job for any reason. If this happens before the loan is settled, you will be required to pay the entire outstanding balance within 60 days. If you are unable to do so, the IRS will charge you with the abovementioned penalties.

And then there’s the more subtle, but more significant long-term consequence: By borrowing from your retirement savings, you’re losing out on the possibility of compounding interest on that money. To make matters worse, people who take out a 401(k) loan often decrease or even stop contributions to their retirement account during the years they’re repaying it. Those factors can have a tremendous negative impact on your savings.

Impact at retirement: Retirement money that you’ve borrowed will not accrue interest until you’ve paid it back. Depending upon the amount you’ve taken out, it can make a big dent in your fund.
Some employers will disallow new 401(k) contributions if there’s an outstanding loan, thus compromising your future retirement nest egg.

When should I NOT consider borrowing against my 401(k)?

While it is a sensible answer for short-term financial needs and highly important purchases, financing a home with a 401(k) loan is not for everyone.

When you purchase a home, you will immediately be required to pay for your monthly mortgage dues–not to mention, the added costs of homeownership such as utilities, maintenance, etc. If your monthly income can barely cover THOSE, taking on a 401(k) loan can end up taking a dangerous toll on your finances. Some people may justify this with plans of making a lump sum payment, but keep in mind that you would still have to qualify based on your monthly income and ability to make regular payments.

For further guidance, it’s highly recommended to speak to your financial advisor or ask your Realtor for local referrals to loan experts who will be glad to help you!

There’s not an ounce of doubt that today’s home buyers know how to prepare for the house hunting process—especially in a market where competition is tight. Very seldom will you find a home buyer who isn’t pre-approved, and most savvy buyers are sure to have everything else sorted out financially.

A well-informed buyer will have a fixed budget, a sizeable down payment at hand, and even extra money to use just in case the bidding war gets vicious.

However, there are a lot of minor inconveniences that most buyers fail to anticipate, and you’d be surprised how much people develop so much unnecessary stress over things that could have easily been prevented. Buying a house is an emotional process, and it’s difficult to keep your emotions in check at all times. But don’t worry–the following tips will help keep you sane throughout this crazy and exciting time:

1| Be on the same page about everything.

Whether you’re buying a house as newlyweds or as a family, be sure that you’re all on the same page about what you NEED and WANT in a home. It’s easy to say that you’ll know what you want when you see it, but this is actually a terrible idea when it comes to buying property.

You’ll be attending a lot of viewings, and will have to keep your enthusiasm at bay for each house you look at. If one family member gets overly excited about a house with five rooms, and you, on the other hand, have already decided on a house with just four–it won’t look good to the seller if you argue about it while you’re touring the house.

You can leave room for compromise, but be sure to discuss the non-negotiables before going on a house hunt.

2| Start your search online.

You can save yourself a lot of time and legwork when you start looking for your dream home online. In no way does this compare to looking at the actual homes in real life, but at least you can instantly narrow down your search to those that are within your price range. According to the NAR 2016 Profile of Buyers and Sellers, nearly a half of all home buyers bought a home that they first saw online. Looking at homes online can also be a way of minimizing arguments during the actual viewing!

3| Encourage healthy conversations.

Of course, no matter how much you try to come up with a criteria for the house you want, you’re still likely to come across some features that you could never have predicted prior to the viewing. The key is to be prepared to make unexpected decisions by knowing how to lead productive conversations.

For example, instead of flat out dismissing your spouse’s interest in a bigger-than-expected garage, find out if you can make this space work for you as well. If you like the color of the walls and the kids don’t, present a scenario in which you repaint their rooms in the color of their choosing. Be open to suggestions and make every discussion a productive one. Think in terms of possibilities instead of limitations–but be sure to think within your budget.

4| Let your agent do the talking on your behalf.

You were wise enough to hire a professional to help you navigate the home buying process. The only thing you need to do now is to trust him/her to represent you.

Real estate agents are trained communicators, and they’ll know how to voice out your concerns without offending the seller or putting your offer in jeopardy.

Buyers are encouraged to consult with their agents regarding technical matters of the sale, and it is the job of the agent to help buyers come up with a solid plan that would lead to a successful closing. Keep in mind, though, that you must always be in control of your own purchase. Don’t let your agent lead the way entirely. Your agent’s job is to guide you and present you with options, and not to take over the home buying process.

Do your own research, know what you want, and talk to your agent when you’ve set clear priorities. This way, you won’t end up with a house that your agent decided on for you.

5| Practice acceptance.

Be at peace with the possibility of you not getting the first home you fall in love with. When you find yourself caught in a bidding war for a house, learn to let go when you know that there’s no way you could win without breaking the bank. In such cases, it’s better to accept defeat and move on.

It may be hard to believe this when you’re still mourning the loss of your dream home, but trust us: There will always be a better house for you.

Before landing your dream home, the first order of business would be the initial process of finding it. Buyers should expect a lot of tours before finding “the one”–but although sellers are often the ones who have to “impress,” buyers should not be too lax about their behavior. If competition ends up being tight, the seller is bound to choose a buyer they really like (with a strong offer to match, of course), which means that you’ll likely score low if you were an obnoxious home viewer during the open house.

How should a buyer act during an open house?

We can all agree that any buyer would love the idea of getting a great deal, but arrogance and poor etiquette can sometimes enter the equation when the buyer is too focused on getting what he or she wants.

Remember: Respect for sellers, real estate agents and even your competition is crucial. Being an obnoxious home buyer could actually cost you in the hunt for your dream home. Here’s how you can remain professional and at your best behavior at all times:

1. Get pre-approved.

Perhaps the first thing any buyer must have before shopping for a home is a pre-approval letter from a lender. Looking at a house without knowing if you’ll be granted a mortgage is simply misleading–and could potentially waste the seller’s precious selling time.

A mortgage pre-approval is proof of your capability to finance the home, and sellers often don’t entertain buyers without a legitimate letter in hand.

2. Be on time.

Being punctual is a sign of respect for the seller’s time and effort. Arrive at the agreed-upon time, and call to inform the realtor or seller if you’re running late. While uncontrollable circumstances may cause some delay, it is unacceptable to make last minute changes, especially if it is a private home viewing and serious preparations have been made on the seller’s end. If you asked the seller to leave for the viewing, you should definitely show up on time.

3. Leave nothing, not even footprints.

The house you’ll be touring is sure to have been de-cluttered, deep-cleaned, kept shiny and left odor-free for your arrival, and it would be expected of you to extend the same amount of graciousness and courtesy by leaving the home as it was before you entered.

Avoid bringing in food and drinks (they’ll offer you some, anyway), and make sure that your shoes don’t leave any kind of marks on the floor. Ask the seller or realtor where you can wipe off the dirt under your shoes before entering–or better yet, just leave your shoes at the door.

4. Limit the entourage.

It is understandable for the entire family to want to see all the houses during the hunt, but you may want to save the family field trip for later (when you’ve narrowed down your choices to the final three). Bringing your children can lead to too much mess and noise, and it’s just rude to have unruly grade schoolers running around a house that was professionally staged for an adult viewing.

5. Keep rude comments to yourself.

While it is perfectly acceptable to voice out serious concerns about the home, it is best to keep opinions on taste and style to yourself. If you find the wall colors a little too playful for your liking, or if you think the paintings that are hung up on the living room are a little tacky — it is best to just save the conversation for when you’re outside the house. These are things that could easily be remedied once you decide to buy the home, so don’t risk offending the seller by rudely commenting on their personal preferences.

6. Take nothing but photos (but ask permission first).

It should go without saying that you should NOT take anything from the home, and that it is your responsibility to make sure your children aren’t lurking around the rooms and putting things in their pockets. The only thing you can take with you are photos, but only after you’ve asked the seller or realtor permission. If the sellers are still living in the home, they may find it a little invasive for you to take too many photos. Ask them about any privacy concerns, and take your photos accordingly.

7. Don’t overstay your welcome.

Of course you want to see every corner of the home, since you may end up living in it–but make sure to walk through the house with purpose so as not to waste any time. Make a list of all the things you want to check in the home, and move through and around it with specific goals. Time is the seller’s most important resource during the home’s listing period, so limit your tour to 45 minutes, or 1 hour tops.

Want to know what lenders look at when they evaluate your loan application? It’s a combination of things.

Banks evaluate your attitude towards debt, predict your future income based on past and current employment, and measure your seriousness to purchase a home by asking how much down payment you will be able to put down. They also look into factors such as market conditions and collateral which are typically out of your control. Not to worry, though, because there are still a number of things you can do to prepare for your application and find the right time to lodge it.

Here are the most important factors that affect your mortgage application:

1| Credit

Financial health is one of the most important considerations for mortgage qualification, and is mainly determined by your credit score. Typically, the higher your score, the lower your interest rates will be. When your credit score falls below 740, it may be challenging for you to qualify for a conventional mortgage. Lower credit scores may leave you with subprime options with high interest rates.

Be prepared!

Know your credit score before applying for a mortgage. To have a clear idea of your status, request a copy of your credit report from the three major reporting agencies (TransUnion, Experian, Equifax) and analyze where you stand. Identify all the problem areas in your report and take the necessary actions in order to improve them.

For example, if there are inaccurate, incomplete, or unverifiable items in your report, dispute them immediately by providing the credit bureau enough information to investigate. If you have small balances on several credit cards, start paying them off. Finally, pay your bills on time and avoid incurring any new debt. It may take a few months to make a significant impact on your score, but it will all be worth it once you’re ready to apply for a mortgage.

2| Employment

When applying for a mortgage, lenders consider your income just as much as your assets. Meaning–your readiness to buy a home is measured not just by how much money you’ve saved up for a down payment, but also by how much money you make on a monthly basis.

When it comes to loan eligibility in terms of income, lenders will consider your combined income from all sources, taking the following into account: alimony, child support payments, retirement benefits, investment returns, bonuses, and other regularly occurring payments. But for most applicants, their monthly paycheck makes up the bulk of their loan-eligible income.

Be prepared!

A strong employment history indicates stability and proves that you have the means to settle your monthly dues. If you’ve been with the same employer and in the same field for two years or more, lenders are more likely to consider your application. If you have these qualifications, avoid taking on a new job before closing, as this may negatively affect the status of your application. Remember, you will be asked for proof that you are currently employed, and the lender may even have to reach out to your employer for verification.

In other cases, you may need to have a different approach:

If you’ve already changed jobs, be sure to explain your reasons in detail. Mortgage professionals need to be sure that your new position won’t have a detrimental effect on your income, so prepare the necessary documents to prove that the change is actually a wise decision or a step up in your career. If you are staying in the same field (better if you’re accepting a pay raise or promotion), then it won’t really be a problem.

If you have variable income or employment gaps, you may need to provide detailed documentation of your cash flow over the past two years. It also pays to be aware that lenders may need to take a more conservative approach when calculating your total monthly income.

For self-employed workers, it is advisable to prepare two years’ worth of accounts and/or tax returns, a track record of regular work, bank statements that can show a consistent stream of healthy deposits, as well as a good credit report. Also, take our word for it and hire a certified accountant to do the work for you. It adds legitimacy to your claims and shows lenders that you’re serious about getting a loan you can afford.

However, if you don’t have a record of two years of accounts, don’t worry–not all hope is lost! Lenders will still consider your application as long as you have evidence of work lined up for you in the foreseeable future, especially if you have a history of working in the same field as a regular employee before venturing into full-time freelance work.

Important note for all mortgage applicants, whether you have a regular job or are self-employed: Be sure that you’re buying a property with combined monthly payments (which includes insurance and property taxes) that add up to 1/3 (or even less!) of your monthly income. Lenders are wary of approving loans that will result in borrowers using half of their income just to pay it off.

3| Down Payment

Once you’ve already established your capability to repay the loan on a monthly basis, the next thing you’ll have to be prepared to show is the money you can pay NOW. Lenders are most likely to approve a loan when the home buyer applying for it is able to pay at least a 20% down payment. Of course–the higher you can go, the better.

Be prepared!

While a 20% down payment is generally the standard of being a capable buyer, lenders are more likely to consider borrowers who can put down more than that. If you have a solid understanding of using an escrow account, this can also win you points as well.

Why should the lender care about how much down payment you can afford? Well, having a sizeable down payment for your new home reduces the risk for the lender as it gives you instant equity to the home. It also says a lot about your ability to save up a hefty amount of cash–which means that you have a better chance at making balloon payments to pay off the loan early.

If you don’t have 20% down payment saved up, this doesn’t mean you won’t get approved. However, you will likely be required to pay for private mortgage insurance (PMI) if your down payment is 10% or lower. The good news is that if you have good credit, you can get by with a small down payment (some lenders require only 3 or 5%).

Just remember: When applying for a loan, you can always work with what you have as long as you know how to leverage your strengths.