I married during the summer of 2007 and am doing taxes for the first time with my spouse.
Typically I understand it is better to file married and jointly. My husband took money out of his 401K to put towards the purchase of our house. We understand there is a penalty, although at the time we didn't realize it applied to the house. Our question is would be better of to file Married but separately?

Probably not. If you want, you can crunch the numbers both ways and see how things pan out.