Hi Lizzbrown,
Thank you for the question. As noted, if you use the 401K for the down payment, you will pay the 10% penalty as well as tax on the money withdrawn. However, there is a work-around for that. If you borrow the money from the 401K and continue to work, you will not incur any tax or penalty. This holds true only if you continue to work until the full amount of the 401K that you borrowed is paid back.
As belatedly noted, this was not a 401-K since you had left the employment. In that case, you would qualify for the 10% avoidance and only pay the tax on the distribution.
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