Finding Mortgage Relief In Your 401(k)

On May 20, 2011, in Foreclosure, by Justin Velthoen
Mortgage Relief

Mortgage Relief

It isn’t what you’ve been saving for, and it will come at a price, but that 401(k) account you’ve been building for years might be the mortgage relief you need if you’ve fallen behind on your mortgage payments. Many companies allow employees to take money from their 401(k) accounts for what is called a “hardship withdrawal” to help manage difficult financial situations.

“Preventing foreclosure or eviction from your home” is among those hardships, so if circumstances have made it difficult for you to stay current with on your mortgage, consult your 401(k) administrator to see if a hardship withdrawal is an option to get back on track. Before you get your expectations too high, though, here are some things you should know.

Do you qualify for a hardship withdrawal?

While all 401(k) plans are different, those that offer hardship withdrawal programs do so under largely the same guidelines. Before you do anything, check your 401(k) management website to see if such a program exists in your case. If you don’t manage your account online, consult with your company’s human resources department for direction.

If your account does allow for a hardship withdrawal, expectyour plan provider to require documentation that demonstrates your need. You’ll likely be required to show a letter from your lender indicating that you’ve defaulted on your loan, as well as recent mortgage statements that show how far behind you’ve fallen. Expect that obtaining those documents you’ll need, as well as submitting the request form and hearing back, will take some time.

What are the penalties?

Since a hardship withdrawal is not loan, but rather a disbursement of a portion of your retirement funds, any amount you withdraw is subjected to IRS penalties. Typically, two types of hardship withdrawals exist, only one of which applies to homeowners attempting to get current on their home mortgage. It’s typically referred to as a financial hardship withdrawal, and if offered, it’s available for reasons that include:

  • purchasing a primary residence
  • preventing foreclosure or eviction from your home
  • paying college tuition for yourself or a dependent
  • paying medical expenses that are un-reimbursed

Hardship withdrawals in these cases are subjected to applicable income taxes, as well as a 10-percent early-withdrawal penalty if you are under the age of 59-1/2. Perhaps those penalties seem like a small price in exchange for keeping your home. Just be sure you’ve exhausted all other options before pulling from your retirement savings; the purpose of your 401(k) is to provide income in the future, and hardship withdrawals should be considered only as a last-resort.

Justin Velthoen of Toucan Homes is a real estate professional. The content presented above should not be considered tax or legal advice, and is intended only to assist homeowners in finding general answers to their questions. Toucan Homes recommends that homeowners seek professional tax and legal advice from a licensed lawyer and/or CPA.


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