Here is my two cents so take it for what it is worth. With 185K income you should target about 30% of gross income for Principal, Interest, Taxes and Insurance which gives you a budget of $4500/month. With your income that will still leave plenty for retirement savings, college funds and all the fun you could want to have.
On a $550K home plan on a max $600 month taxes and $100 for insurance (assumes you buy close to UC and have low or no Mello Roos). That leaves you $3800/month. You will likely be getting an older home and will want some of your savings for remodelling so in your position I’d put the 5% down (that is what I would do). Borrowing $525K would cost you $2900/month Principal and Interest even if you got a 5.25% rate. If you got a better rate or a less expensive home it would be lower. That puts you close to $1,000 below budget which is good thing. Borrow the $25K from your 401k and use that extra to pay it back in 2 years. After that you could use it for extra principal payments, retirement funds or college for kids. Sounds like you have a good situation and a level head. Find a good house that can meet your needs for the next 10 to 20 years and you will be fine.
