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If you are facing a home foreclosure, borrowing money from your 401(k) plan is one resource you can tap. Though there might be certain restrictions, a 401(k) plan might allow you to take out a hardship loan against your balance. Here's what to consider to determine if this is the right decision for you.
- Determine how much you need to borrow. A 401(k) plan might limit your loan to the lesser of 50 percent of your vested balance or $50,000. Vested means the portion of your 401(k) that belongs to you, regardless if the contribution was by you or a company match. In many cases, employees become fully vested after five years with a company. Some plans will not let you borrow less than $1,000. Call your lender and find out how much money you need to bring your mortgage current.
- Call your 401(k) plan administrator. You might be able to apply for a loan over the phone, though you usually will be asked to fill out an application. Fill out the paperwork and send it back to your plan administrator. If no paperwork is required, your phone call should set the process in motion. Taking out a 401(k) loan is preferable to a hardship withdrawal because there is no tax penalty. With a hardship withdrawal, you are subject to a 10-percent penalty if done before age 59 ½.
- Determine how you will repay the loan. Most loans of this sort are paid back through payroll deduction. You will be able to set up the terms and agreements with the 401(k) plan administrator. You will likely have five years to repay the loan. Find out how much will be taken out of your paycheck each period.
- Once your loan is approved, you will receive the funds by check. Deposit the check right into your bank account and wait for it to clear. You can then use your own personal check to pay your mortgage company and get your home out of foreclosure.