Using Your Financial Portfolio to Buy Your New Home

Buying a house these days can be pretty costly, especially if it’s your first one. There aren’t as many programs for homebuyers who are just getting started as there used to be, and not everybody can ask a relative for a down payment. So where can you go for help buying your new home? You may want to consider using your financial portfolio. It’s not always the best idea, depending on your individual situation, but it can make sense for many people trying to enter the real estate market.

401(k)s Are a Good Source of Down Payment Cash

Unlike a loan from friends or family, your 401(k) is your own money. Sure, it’s designated for retirement, but having a home that’s free and clear is an important element in allowing people to do just that, which is why so many people opt to root around in their retirement accounts for down payment money. But is it legal? Of course it is. In fact, there’s a special rule that allows you to use your 401(k) or equivalent retirement account this way. You’ll want to check with your financial advisors about any rules your retirement account has that may be stricter than federal laws, but in general you have two options:

• Withdraw the funds you need. However, if you do so, you may not be able to do it without some kind of financial penalty if you’re younger than 59 ½. You will almost certainly owe tax on the withdrawal since you put it into your account pre-taxed, and you’ll also likely owe a 10 percent early withdrawal penalty. Still, in some financial scenarios, this makes sense to do anyway.
• Borrow against your 401(k). For more people, especially buyers with substantial 401(k)s who are many years away from retirement, a loan against a 401(k) account is the solution. Since it’s your own money, you’re going to end up paying yourself back, offsetting losses that might otherwise occur if you’d simply withdrawn those funds entirely. But keep in mind that if you default on your loan to yourself, you’ll generally be forced to convert the loan to a withdrawal, and all the related penalties will apply.

Using Your Stocks and Bonds for a Down Payment

There’s lots of talk about using 401(k)s as down payment fodder, but less about using stocks and bonds. To do this you’ll have to be thinking longer term, as you can’t just pop into the market today and walk away with down payment money tomorrow. But since stocks and bonds are essentially liquid, they can be easily sold and that money used toward a purchase.

Ideally, you’d hold your original investments and sell off the gains when you were ready to go home shopping, but since there are no real penalties (aside from any associated with your brokerage account), you can completely liquidate if you feel so inclined. Like a 401(k), stocks and bonds are your own money, just a little bit easier to get to. They’re more volatile, however, so be aware of what you’re investing in and why, or you may end up further behind than when you started. Moving your savings into stocks and bonds can help you grow that down payment much faster than you’d be able to do otherwise, especially with the guidance of a smart and savvy professional.

One Last Word on 401(k)s

One last thing that’s important to note when it comes to 401(k)s: they can also be used in place of reserve funds for most lenders. Depending on your profile as a borrower, you may be asked to provide proof that you have substantial savings - this is your “reserve.” For many buyers, it’s not possible to do this with bank accounts alone, but a 401(k) will substitute because of its steady nature. Be sure to discuss your 401(k) or IRA with your lender when you’re applying for a mortgage.