Recently, a buyer made an offer on one of my listings and a day before the mortgage commitment date, it was reported that the buyer needed more cash for the down payment.  Seems the loan program he signed up for went away!  In today's tough financing environment, I'm sure that this is not the first time that this has happened.  

Where to get some cash?  Borrowing from friends or relatives? (risky); Getting someone to co-sign? (may end a long term friendship); Borrowing from  your 401K retirement account?  (Maybe not a bad idea!!)   

Yes, the IRS does allow a "hardship distribution" from a 401K retirement plan (if allowed by your employer).  For this to work, the distribution needs to be "an immediate and heavy financial need" and for  "costs relating to the purchase of a principal residence"  (among several options).

Also, once the distribution is made, the employee can't make new contributions for 6 months and unlike a loan, hardship distributions are not re-paid to the plan - your plan balance is permanently reduced.   

Disclosure:  I'm not a tax attorney or CPA so please check with one of these professionals for an opinion before taking any action on this approach!  

Here's an excerpt from the actual IRS web site's FAQ's (underlining is mine for emphasis):    

1. Under what circumstances can a participant get a hardship distribution from a retirement plan?

A retirement plan may, but is not required to, provide for hardship distributions. Many plans that provide for elective deferrals provide for hardship distributions. Thus, 401(k) plans, 403(b) plans, and 457(b) plans may permit hardship distributions.For a distribution from a 401(k) plan to be on account of hardship, it must be made on account of an immediate and heavy financial need of the employee and the amount must be necessary to satisfy the financial need. The need of the employee includes the need of the employee's spouse or dependent. (Reg. §1.401(k)-1(d)(3)(i))

Under the provisions of the Pension Protection Act of 2006, the need of the employee also may include the need of the employee's non-spouse, non-dependent beneficiary.

Whether a need is immediate and heavy depends on the facts and circumstances. Certain expenses are deemed to be immediate and heavy, including: (1) certain medical expenses; (2) costs relating to the purchase of a principal residence; (3) tuition and related educational fees and expenses; (4) payments necessary to prevent eviction from, or foreclosure on, a principal residence; (5) burial or funeral expenses; and (6) certain expenses for the repair of damage to the employee's principal residence. Expenses for the purchase of a boat or television would generally not qualify for a hardship distribution. A financial need may be immediate and heavy even if it was reasonably foreseeable or voluntarily incurred by the employee.
(Reg. §1.401(k)-1(d)(3)(iii))

5.  What are the consequences of taking a hardship distribution of elective contributions from a 401(k) plan?

After an employee receives a hardship distribution of elective contributions from his or her 401(k) plan, generally the employee will be prohibited from making elective contributions and employee contributions to the plan and all other plans maintained by the employer for at least 6 months after receipt of the hardship distribution.
(Reg. §1.401(k)-1(d)(3)(iv)(E)(2))

Hardship distributions are includible in gross income unless they consist of designated Roth contributions. In addition, they may be subject to an additional tax on early distributions of elective contributions. Unlike loans, hardship distributions are not repaid to the plan. Thus, a hardship distribution permanently reduces the employee's account balance under the plan.

Here's a link to the IRS web site with complete details:

http://www.irs.gov/retirement/article/0,,id=162416,00.html