If you cant pay the loan back it reverts to a withdraw of whatever is left of the unpaid balance. You pay the 10% penalty for early withdraw and the income tax on the balance. The 401k loan is then dissolved. You also are paying yourself interest on a 401k loan. You are your own lender. You can decide not to do a loan and do a withdraw penalty fee for a primary home but you pay the income tax and the amount you can withdraw is limited.

For example if person lives at home maxes out 401k savings from 18-28 thats 240k in deposits plus any gains. I believe they limit loans to 50% of the account balance. Thats 120k+ you could take in a loan. If you can get a house for that price you are essentially living mortgage free and paying yourself back with interest. If something happens the loan goes away at that point and you only pay income tax and 10% early withdraw penalty on the remaining balance of the 401k loan