I have an IRA that I haven't paid into for over 10 years. I also have a State retirement plan that I have paid into for 10 years and will continue until I retire. Besides the penalties, any reason I shouldn't use the old account to pay off bills before we buy a house?
Generally I wouldn't recommend taking the penalty, since it's pretty steep, but there are some situations where it might be a good idea. In particular, you should take the penalty if the money could save you from something even worse than the penalty.
You mention paying off bills. If you mean high-interest debt that you otherwise can't pay off quickly, then you might consider using the IRA. Examples might include credit cards or payday loans where, despite your best efforts, you can't make more than minimum payments. If there is another way to pay them off in some sort of reasonable amount of time, though, it might be better to do that.
On the other hand, if you just have your heart set on a house and the bills are somehow getting in the way, it's probably better to delay your dream for a little while until you can pay off the bills another way. Every little bit of saved money counts, and, as I said, the penalty for early withdrawal is pretty steep.