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Some millennials are raiding their 401(k)s for a down payment — there are better ways to do it

‘This is a clear sign you’re not ready to buy yet,’ financial experts caution
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According to a survey by Bank of the West, 29 percent of millennials who already own a home have taken out a loan or withdrawn from an IRA or 401(k) account. Torwaistudio / Shutterstock

Rising prices are making it difficult, if not impossible, for some first-time home buyers — especially millennials — to come up with enough cash to cover the down payment.

To get in the game, some millennials are raiding their retirement accounts for that money, according to a recent report from Bank of the West. The 2018 Millennial Study, released in July, is based on a nationwide survey of more than 600 millennials (ages 21-34). The key findings:

  • Three in 10 millennials (29 percent) who already own a home have taken out a loan or withdrawn from an IRA or 401(k) account.
  • Two in 10 millennials (19 percent) who plan to buy a home expect to dip into their retirement accounts to fund their purchase.

Ryan Bailey, head of Bank of the West’s retail banking group, calls these findings “alarming.”

“Millennials are so eager to become homeowners that some may be inadvertently cutting off their nose to spite their face,” Bailey said in a statement. “With careful financial planning, millennials can have it all — the dream home today, without compromising their retirement security tomorrow.”

Three in 10 millennials (29 percent) who already own a home have taken out a loan or withdrawn from an IRA or 401(k) account.

The Bank of the West survey also found that millennials are more likely than other generations to have regrets about buying a home, indicating they may have rushed into the decision without asking all the right questions.

“A white picket fence can certainly be a smart investment. To avoid buyer’s remorse, millennials should cover their bases and kick the proverbial tires — reflecting on their physical and financial wishes for a home before they sign on the dotted line,” Bailey said.

Yes, millennials do want to own a home

Millennials are different from previous generations in many ways, but surveys show they still share the American dream of owning a home.

“The desire remains strong,” said Lawrence Yun, chief economist at the National Association of Realtors. “About 80 percent of renters, especially millennials, indicate they would like to own at some point in the future.” Current market conditions can kill that dream. With the median selling price for a house now $231,700, according to Zillow, a 10 percent down payment of $23,000 can be a deal breaker for a younger, cash-strapped buyer. In a hot market, such as Seattle, where the median selling price is $710,000 and a 20 percent down payment is the rule, that’s $142,000.

Yun doesn’t believe tapping retirement funds to buy a house is necessarily a bad thing.

“For the middle-class, most wealth is tied to their homes,” he said. “So, to the degree that [younger buyers] are pulling the money out and not using it for general consumption, but in a sense, they're just switching investment from stocks and bonds into real estate, I would consider that as a more neutral move.”

Financial advisors contacted by NBC News BETTER cautioned against tapping retirement savings to buy a house. For most millennials, they noted, the 401(k) will be the major source of income during their retirement years.

Rebecca Steele, president & CEO of the National Foundation for Credit Counseling (NFCC), called it a “terrible idea” that doesn’t make sense.

“There’s no reason that millennials should trade in a financially secure retirement for the purchase of a home,” Steele said. “Using retirement funds to cover the cost of a down payment in lieu of sufficient savings or more affordable housing options is a short-sighted move that can have lasting negative consequences.”

The most important move any homebuyer could make is to explore all other options and make the most informed choices, which can be done with support from nonprofit homebuyer education programs such as those offered by the NFCC and other HUD-approved agencies, she said.

“If the retirement fund remains the only available source of money for the down payment, it’s not the right time to buy a home,” Steele cautioned.

Other options to consider

There are funding options for first-time home buyers that range from the simple to the complex, according to Ilyce Glink, a personal finance expert and reporter.

“You could talk to a parent about borrowing money or getting a gift from them,” Glink said. “You could work a second job and dedicate all of that money to building your down payment. There are ways to raise the cash other than raiding your financial future.”

In her book “100 Questions Every First-Time Home Buyer Should Ask”, Glink advises millennials to check out these resources:

  • helps you find free and available cash for down payments available from housing finance agencies, realtors, multiple listing services (MLSs) and lenders. The site says 87 percent of U.S. homes are eligible for some type of homeownership program.
  • U.S. Department of Housing and Urban Developments’ helps you find HUD homes and FHA foreclosures. Down payments can be as low as 3.5 percent. HUD’s Good Neighbor Next Door program offers a 50 percent discount off the list prices of eligible properties to law enforcement officers, firefighters, emergency medical technicians and teachers.
  • FHA loans can be another smart option for first-time home buyers, even those with fair credit (580 or higher). Rates are higher than a traditional loan, but borrowers who qualify for an FHA loan can make a down payment of as little as 3.5 percent.
  • Veterans should consider a zero-down VA Home loan.
  • Low- and moderate-income families who want to buy in a rural community should check the U.S. Department of Agriculture’s Single Family Housing Guaranteed Loan Program.

The bottom line

If after weighing all the options you decide to dip into your retirement savings, take out a loan rather than make a withdrawal, financial experts told NBC News BETTER. You do have to pay back the loan — with interest — but it’s not a taxable event. Generally, there is a tax penalty for an early withdrawal.

"It's always better to get your financial house in order, clear debt out of the way and then buy a home when it's affordable for you, without cutting into your retirement savings,” NFCC’s Steele said. “If you’re going to make the decision to dip in to your retirement savings, borrowing is the better choice — but it's not recommended to either borrow or cash out. Neither is a good idea."


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