For first-time homebuyers, the thought of coming up with enough money to cover the down payment on a home can be overwhelming. Conventional wisdom suggests that you should have at least 20% of the purchase price saved up. So, what can you do if you don’t have that cash on hand when you’re ready to buy? Believe it or not, you’re allowed to withdraw money from your IRA to help cover the cost. Doing so isn’t cut-and-dried. Here’s what you need to know to make the right decision.
Only First-Time Homebuyers Qualify
If you want to use your IRA to help finance the purchase of a house, you must be a first-time homebuyer. This rule is established by the IRS. Provided that you qualify to take money from your IRA, you’ll be able to avoid the early withdrawal fee.
The Definition of First-Time Buyer Is Looser Than You Think
The biggest benefit of the IRS’ definition of first-time homebuyers is its flexibility. According to the IRS, first-time homebuyers are anyone that hasn’t owned a home in the last two years. That means you’re able to withdraw from your IRA even if you’ve owned a house in the past. You just can’t own a house for two years prior to the withdrawal.
There’s a Cap to What You Can Borrow
Unfortunately, you’re not able to borrow an unlimited amount of money from your IRA. The IRS has a hard limit of $10,000. And that’s the maximum you can borrow for your lifetime. That means you’re not able to use the IRA to help pay for a new home even if you’re drawing from a new IRA.
That said, you can always borrow from your 401(k) plan if you have one. These retirement accounts allow you to borrow as much as 50% of your account’s value or $50,000 max to use toward a home purchase. You won’t have to worry about unexpected fines, fees, or tax penalties, either.
Ready to Explore Your Options?
If you’re ready to transition from renters to first-time homebuyers, we can help. At Mortgage Solutions Financial, we’ll help you find the perfect loan for your budget and your financial situation so you can start building equity rather than paying for an overpriced rental. Contact us today to discuss your needs and get started with the mortgage application process now.