One of the biggest obstacles when buying a home — especially for first-time homebuyers — is coming up with the down payment. That’s why some people use their 401(k) for a down payment instead of saving up the cash.

If you’re having trouble gathering money for a down payment, pulling from your retirement fund is an option. But drawing from your 401(k) comes with a few drawbacks.

Here’s what you should know before using a 401(k) to buy a house.

While using a 401(k) for a mortgage down payment is possible, it’s not necessarily the best option.

A 401(k) is an employer-sponsored plan intended for retirement purposes. Each year, you can contribute a certain amount to your account. Some employers will even match some or all of your contributions, making it easier to prepare for retirement.

The amount you contribute to the plan is pre-tax, meaning your money is deposited into your 401(k) account before it gets taxed. This deducts your contributions from your taxable income, so you could end up paying less income tax each year that you contribute. Once you turn 65 years old (or 59 1/2, in some cases), you can withdraw from your plan without penalty. You could, however, be taxed on the amount.

Although you can technically withdraw money from your 401(k) for any reason, you might face a 10% early withdrawal penalty. Taking money out of your account also cuts into your total retirement savings. So, while it might seem like a good idea to use the money for a down payment, it’s wise to consider the long-term costs first.

If you want to use your 401(k) to buy a house, you have two options:

While a 401(k) withdrawal permanently removes funds from your savings, a 401(k) loan allows you to borrow and repay money to yourself with interest over time. Additionally, because you can avoid the 10% early withdrawal penalty by taking out a 401(k) loan, this plan is typically the better option for minimizing costs. 

Using a 401(k) loan to buy a home or pay off a mortgage early could be helpful, but it also comes with some drawbacks.

While withdrawing from your 401(k) for a down payment may be tempting, there are several reasons why it’s not recommended.

Typically, you’ll have to pay a 10% early withdrawal penalty for taking money from your 401(k) account. However, you may be able to avoid this penalty if you:

If you’re a first-time homebuyer, coming up with the down payment for a house can feel daunting. Depending on the cost of the home and the loan type, you could be looking at spending tens of thousands of dollars — if not more.

For example, you’ll typically need a minimum down payment of 3.5% for an FHA loan. This is roughly $11,429 on a $400,000 mortgage.

A conventional mortgage lender might require a higher down payment, especially if you have limited credit. You’ll also need to put at least 20% down if you want to avoid taking out private mortgage insurance (PMI).

But using your 401(k) for a down payment can be more costly than you might realize, especially when you consider the long-term effects. The hefty withdrawal penalty alone can cut into how much you actually receive.

Even if you take out a 401(k) loan, you could still face potential financial setbacks. For instance, if you lose your current job and fail to repay the loan in the predetermined amount of time, you could end up with penalties or have to pay taxes on the remaining amount.

Additionally, having an unpaid loan balance will leave you with less money saved for retirement.

If you need help buying a house, you may qualify for alternative 401(k) loan options like down payment and closing cost assistance programs. Or, if you have another retirement account, like a Roth IRA, you may be able to withdraw from that instead.

Many states offer down payment and closing cost assistance programs to first-time homebuyers, active military members, and teachers with low- or moderate-income. Options include forgivable cash grants, zero-interest loans, and full-interest loans.

It’s important to check the details of these programs since many come with additional requirements. For example, to qualify for New York’s HomeFirst Down Payment Assistance Program, you’ll need to make less than 80% of the area median income.

For assistance programs intended for first-time homebuyers, you’ll have to meet some general criteria to qualify:

A Roth IRA is a retirement plan that works differently from a traditional 401(k). Roth IRAs are Individual Retirement Accounts that you make contributions to with after-tax dollars. Because the contributions you make have already been taxed, this allows your savings and any earnings to grow tax-free. 

With a Roth IRA, you can make qualifying withdrawals up to $10,000 without additional penalty or taxes. To qualify, you’ll need to be a first-time homebuyer and have an account that’s at least five years old. However, if you don’t use the funds within 120 days of withdrawal, you may owe taxes or other penalties.

Some home loans, such as VA loans, don’t require a down payment or private mortgage insurance. You’ll need to be a qualifying service member or veteran to get a VA loan, though.

To be eligible for a VA loan, you’ll typically have to meet the following criteria:

Certain lenders will also accept a lower down payment if you have good credit and income. Check around to see what your best, qualifying options are.

Related: Learn more about getting a home loan on Credible.com

Private mortgage insurance, or PMI, is a type of homeowners insurance. Lenders typically require it if you get a conventional mortgage without putting at least 20% down. It’s an additional cost that lenders usually tack on to your monthly payment to protect themselves in case you default on the home loan. Once you’ve built up at least 20% equity in your home, you can typically cancel the PMI and lower your monthly payments.

If you want to buy a home, you may be considering using your 401(k) to help with the down payment and avoid PMI. Before you do, consider the pros and cons of doing so.

If you decide to use a 401(k) loan for your down payment, you might qualify for a better interest rate with a mortgage lender while also avoiding PMI. However, you’ll still be responsible for making monthly payments on the loan — plus interest. Depending on what you would have spent on PMI, this might not save you any money.

Additionally, you typically only have about five years to repay a 401(k) loan. This could mean high monthly payments, especially if you borrow a larger amount.

You can remove private mortgage insurance in a few different ways:

Ask yourself whether using your 401(k) or paying the PMI makes the most financial sense in the long run. Calculate how much your monthly mortgage payment will be with the PMI versus how much you’ll be paying for early withdrawal from your retirement plan. You can use a mortgage calculator for the first, and an early withdrawal calculator for the latter to estimate the costs.

Also, consider the risks of using your retirement savings to cover your down payment. The money you take out from your 401(k) account will not grow as you might have originally planned. This could leave you with less money during your retirement years.

Buying a home is a major financial decision, especially when you consider factors like down payments and closing costs. If you have a 401(k), it can seem like a good idea to use the funds to help with the cost of a home purchase. But there are other ways to qualify for a mortgage — without needing to dip into your retirement funds.

Many lenders consider other factors aside from your down payment when determining your eligibility for a loan. This includes things like your credit score, income, total debt amount, and other assets, like your savings.

A good first step is to speak with a mortgage lender to see if you’ll be able to qualify for a mortgage and determine what aspects of your financial profile you can improve to increase your chances of getting approved for a loan.

Related: Learn more about getting a home loan on Credible.com