New Proposed Legislation To Help Save Homes: The HOME Act

A great story in the Sunday Los Angeles Times by Ken Harney about a bill introduced October 5th that would amend the tax code to allow homeowners who have 401(k) retirement plans to pull out money to save their houses from foreclosure without the usual tax penalties. This bill would waive the 10% penalty if the purpose of the distribution is to make loan payments to avoid loss of a primary home to foreclosure. The bill would allow owners to pull out up to $50,000 that could be used in a lump sum to pay down the delinquent morgage balance or to fill shortfalls caused by reductions of household income. It could also be used as part of a loan modification agreement with lenders designed to avert a foreclosure. The money would need to be spent within 120 days of receipt and could not exceed 50% of the funds in the retirement account.

Titled the HOME Act, short for Hardship Outlays to protect Mortgagee Equity Act, the proposal is designed to help avoid some of the known problems of tapping into employee retirement accounts. Many 401(k) plans allow "hardship" withdrawals. but these come with much stricter rules and fewer eligible uses, plus the tax penalties. Hitting your 401(k) is a desparate act for these desparate times. It should be your last resort when there isn't anything else that will save your house and you don't want to walk away. But check your plan documents you may have an alternative buried away that allows a "save-the-house" loan to yourself.