Taking money out of a 401(k) to buy a house is a very expensive way to get your downpayment -- the distribution will be subject to income tax and a 10% penalty if you are under age 59 1/2. Even taking a loan from the 401(k) isn't cheap, the interest rate is something like 6% and will mess up your debt-to-income ratio.

It is up to the administrator if they will approve a residential loan, if the mortgage is only in the wifes name. The one I work for will not, and should not. Loans are for participants ONLY.. it is your plan not your wifes. All documentation MUST include the participants name. The only way to be positive is to ask your administrator..

Yes you can, but you will have to pay a penalty. I wouldn't advise doing it because you will regret having a significantly lower retirement fund when you retire. By that time you won't have any options.

I was told that I will have to pay taxes as if it were income and there is no interest since it is a "hardship withdrawl".

Thank you all for your feedback.

Then it is not a loan, there are two options. Loans and hardship withdrawals.
It is taking the money out of the plan, never to replace it. There will be tax and early withdrawal penalty, no interest.
You must document a hardship, and they will want your name on the mortgage in most cases. Tax is 20% federal, state varies, early withdrawal penalty is 10%---so it will cost you with regard to taxes.