How to Use Your 401K to Prevent Foreclosure

Foreclosure is never an easy situation to face, but one resource that is available to many home owners is their 401K plan. Depending on the terms and existing amounts of the 401K, it is possible to take out a certain sum from this fund as a hardship loan. A few factors determine if tapping a 401K plan is the appropriate choice that will give you the best chances of keeping your home. The application process for a 401K loan is fairly straightforward, as long as you determine all needed amounts to pay for both the mortgage and the 401K loan repayment itself. Budgeting these funds realistically is often the key to avoiding further financial trouble as a result of tapping into your 401K plan.  

Examine the Needed Costs

The first recommended step is to contact your mortgage lender for a quote of exactly how much money is needed to bring your mortgage up to date. The next step is to contact your 401K administrator to determine the maximum amount you will be able to borrow. If you are not fully vested in your 401K, there will be an upper limit to how much you will be able to borrow, usually around $1,000. Most employers require a period of 5 years before an employee becomes fully vested in a 401K, and when this happens, there is usually a minimum limit on the amount you will be able to borrow. Fully vested employees are usually able to borrow up to $50,000 from their 401K, or 50% of any amount under $50,000.

Apply for the Loan

Applications for a 401K loan can be done over the phone or in person, depending on the plan administrator's policies. A hard copy application may or may not be required; if it is, be sure to ask for a copy of it for your records. If at all possible, opt for a 401K loan instead of a 401K hardship withdrawal, since a hardship withdrawal carries a penalty of 10% of the amount withdrawn if you are under the age of 59. Some 401K plans may also require an additional fee to borrow from them. Keep in mind that the IRS considers hardship withdrawals from a 401K to be taxable income, making it subject to the same payment rules as other income.

Set up Repayment

Most 401K administrators allow you to arrange automatic repayments of the 401K loan through payroll deductions. Depending on your situation, the terms of a repayment plan can be stretched to allow you to repay the amount over a period of 5 years or more. It is important to get a quote from the plan administrator of how much will be taken out of each paycheck; this will help you in readjusting your personal budget to make sure you have the funds to cover the repayment.

Pay Your Mortgage Company

After your plan administrator approves your 401K loan, request that the amount be sent to you as a certified check. Once you receive this, deposit it into your checking account. You will then be able to use the funds to pay your mortgage broker in order to remove your home from foreclosure.