Using Your 401K to Prevent Foreclosure

In order to prevent foreclosure, many people end up borrowing money from their 401(k)s. Although this might seem like the best option at the time, it definitely comes with some drawbacks as well. Here are a few things to consider before using your 401(k) to prevent a foreclosure.

Avoiding Penalty

Most of the time, when someone takes money out of a 401(k), he will have to pay a 10 percent early distribution penalty. In addition to that, he will also have to pay income taxes on the money. However, if you want to take out money in order to prevent foreclosure, you should be able to do so without incurring a penalty. In many cases, you will be able to qualify for a hardship distribution of your 401(k). This will allow you to take out the money without any penalties. Another way that you could do this is to use a 401(k) loan. This will allow you to borrow money from the 401(k) and then pay it back with a specified amount of interest over time. 

Hurt Your Retirement

Although your 401(k) is available to help you in this situation, you might want to consider the impact that this can have on your retirement. Most people look at retirement as if it were an eternity away. Therefore, they do not see any problem with borrowing money from a 401(k) when they need it. However, many people fail to realize the large impact that this scenario can have on retirement. In most cases, you have been taking out a small percentage of your income for several years in order to fund your retirement account. Therefore, if you take out a large chunk of the money, it can take you many years to get it back to the level that it once was. This can put you far behind in your savings for retirement.

Avoiding Foreclosure

Many people would argue that retirement would be secondary to keeping your home and your credit intact. If you go through the foreclosure process, it will have a devastating impact on your credit. A foreclosure is going to stay on your credit report for seven years. In addition, it can leave a lasting impact when it comes to purchasing another home. Many experts say that a foreclosure has twice the impact that even a bankruptcy would have on your credit score. Therefore, you should try to avoid going through the foreclosure process at all costs. If you have to borrow some money from your 401(k) to do so, then it may be to your advantage.

If you were to keep the money in your 401(k) and allow the foreclosure process to happen, you may not be able to purchase another home again. Therefore, you may have to spend your retirement years in a small rental instead of a home that you love spending time in.