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Run to the DOL, don't walk. Save as much documentation as you can. I'd be very concerned by a company that is not making payroll.

Sorry, but no way would I ever be able to stretch the language to allow this as a hardship. If you really think it is doable, then you need to request a ruling from the IRS to clarify, but barring that, it is NOT a purchase of his primary residence, it is effectively a rental payment to someone else and that is not a permissible hardship distribution. Anyone who advises a client that this is ok has no basis for such a decision (no regs, no cases, nothing but their own tortured reading of the law), and that's a good case of a malpractice claim. FWIW.