A house can never become a home unless you’re financially responsible enough to pay for it.
When I was in my 20s, I was financially irresponsible with credit cards.
The only way a mortgage lender would have approved me was if I had Professor X’s mind-control powers.
I rented an apartment in Brooklyn, New York for almost 7 years.
Owning a home then seemed like an unachievable ambition to me – like lassoing a unicorn.
I learned later in life that when you understand how a system works, you can make it work for you.
It helps to know such things because new homes are expensive.
The median price of a new home in the United States was $321,000 in March 2020. Most new homeowners pay down payments ranging between 5% to 20%, depending on your creditworthiness and various other factors.
So, why should you know how the real estate and mortgage system works?
Because there are many tax breaks and opportunities in the system to help home buyers and homeowners.
IRA, Roth IRA, and 401(k) Mortgage Loans
Did you know that you can withdraw money from an IRA or 401(k) retirement account to pay a mortgage down payment?
And, all without incurring a 10% early withdrawal penalty.
You can do this even if you’re younger than 59 ½.
If you have a Traditional IRA or a Roth IRA you should be able to withdraw $10,000 for the purposes of making a mortgage down payment. Consult with your plan’s administrator.
IRA
If you and your spouse work and have IRA retirement accounts, that amount can be doubled to $20,000.
Using an IRA retirement fund to pay a mortgage down payment does have conditions.
You can’t have owned a home within the previous two years.
Also, while you won’t pay an early withdrawal fee, you’ll still pay taxes on withdrawals.
Roth IRA
The true tax breaks come with a Roth IRA retirement account. The I.R.S. taxes such accounts before any withdrawals are made.
If you’ve owned a Roth IRA account for at least half a decade, all earnings are tax-free as well.
401(k)
You can borrow $50,000 from a 401(k) for the purposes of buying a home
When it comes to a 401(k), you can withdraw a penalty-free and tax-free loan commensurate to half of your available balance. However, this amount cannot exceed $50,00.
The repayment terms for such loans can be extended as well.
If you leave your job, or become unemployed, you’ll have to repay the loan in full before your next tax return is due.
Additionally, you’ll pay taxes on any unpaid balances and a 10% penalty for early withdrawal before age 55.
Tread Carefully
I wish I knew these things when I was a salaried worker long ago.
Now that you know how to work the system to increase your chances of home ownership, tread carefully.
Consult a financial adviser. You can find many who consult for affordable fees or free.
All retirement accounts are not made equal. Inquire at work or ask an adviser if you can withdraw a loan for such purposes.
Don’t think of withdrawing funds from a retirement account if you know you can’t repay it in a timely fashion.
You’re better off taking time to save more money and/or rehabbing your credit.
The only thing harder than buying a home, is keeping it.
Read More
How To File Complaints About Credit Counseling Service
HOME UPGRADES THAT DON’T ADD RESALE VALUE
WHAT LOANS CAN YOU GET WITH A FAIR CREDIT RATING?
WHAT DEFINES A “GOOD HOME LOCATION” WHEN HOME BUYING?
WHEN IS A SPOUSAL CONSENT REQUIRED FOR APPROVING LOANS?
Allen Francis was an academic advisor, librarian, and college adjunct for many years with no money, no financial literacy, and no responsibility when he had money. To him, the phrase “personal finance,” contains the power that anyone has to grow their own wealth. Allen is an advocate of best personal financial practices including focusing on your needs instead of your wants, asking for help when you need it, saving and investing in your own small business.