At first glance, the idea of buying a house with a credit card sounds irresponsible, if not impossible. While it technically is possible to do so in very limited circumstances, it’s generally not a good idea, especially if you have less expensive options available.
Whether you’re thinking about using a credit card for a home down payment or to buy a house outright, here’s what you should know.
[Read: Best Mortgage Lenders.]
How to Buy Real Estate With Credit Cards
In certain situations, it may be possible to achieve this goal, particularly if you live in an area where fixer-upper homes are worth tens of thousands of dollars rather than hundreds of thousands.
You may also consider it if you’re having a hard time qualifying for a traditional mortgage.
But title companies won’t swipe your card as you’d do at a grocery store. The merchant fees would be expensive, and title companies don’t consider credit cards to be certified funds.
If you have a credit card with a high enough credit limit, though, you could feasibly take out a cash advance and then use those funds to wire the payment or obtain a cashier’s check, which you can send to the title company to close the transaction.
If you don’t have a single card with a high enough limit, you could take out cash advances on multiple cards to accomplish your objective.
Why Buying a Home With a Credit Card Is Not a Good Idea
It’s certainly possible to buy an inexpensive property with a credit card cash advance, but it’s generally not the best way to do it. Here’s why:
— It’s expensive. Credit card cash advances often carry higher interest rates than regular purchases, so you may be paying a rate in the mid-20% range. They also come with upfront fees on top of that. “You are digging yourself in a very deep hole before you’ve even gotten started,” says Ruth Shin, founder and CEO of PropertyNest.
— You may not have enough available credit. Even if the home you’re buying is cheap, credit cards often have lower limits for cash advances than for regular purchases, so you may not be able to come up with the full amount.
— It can damage your credit. If you manage to get enough with a cash advance, you’ll likely end up with a high credit utilization rate, which can hurt your credit score until you pay down the balance to a reasonable level.
— You won’t get a grace period. Unlike with purchases, credit card cash advances don’t qualify for the standard grace period, which means that interest starts accruing from the date of the transaction.
— You won’t earn rewards. If you’re considering a cash advance so you can earn rewards on the purchase, forget about it — cash advances are not eligible for rewards.
Can You Make a Down Payment With a Credit Card?
Although it may be possible to buy an inexpensive house with a credit card, you won’t be able to do the same with a down payment on a mortgage loan.
That’s because the primary purpose behind a down payment is to demonstrate your investment in the home to your lender. If you’ve borrowed your down payment money via a credit card, you haven’t actually contributed anything. Plus, mortgage lenders typically don’t like to see applicants taking on new debt in the months leading up to the mortgage application process.
“Using a cash advance for down payment funds conveys inadequate reserves and is a red flag that a borrower is not qualified for the loan amount requested,” says Doug Perry, strategic financing advisor at Real Estate Bees.
Even if you try to take out the advance ahead of your application, mortgage lenders typically like to see several months’ worth of bank statements to understand the source of your down payment funds.
[Read: Best Mortgage Refinance Lenders.]
When You Can Use Your Credit Card During the Homebuying Process
Although you most likely won’t be able to use a credit card to buy or put money down on a home, you may be able to use your card for certain expenses along the way that aren’t paid directly to the lender.
“Instead of using your credit limit to buy a house, consider paying for other homebuying-related expenses such as inspections, appraisals, attorneys, insurance and moving costs with your credit card,” says Shin.
Other potential options include:
— Maintenance and repairs.
— Utility setup costs.
— New furniture and fixtures.
It’s also possible to make mortgage payments with your credit card through a third-party payment service like Plastiq, but these services typically charge a fee, which will likely cost more than the value you’re getting in rewards.
Keep in mind, though, that it’s best to avoid using a credit card to make these and other purchases unless you can pay for them in full each month. It’s also best to avoid using your card for something that would require a cash advance or that involves a convenience fee canceling out any rewards you’d earn on the purchase.
What to Do if You’re Having a Hard Time Getting a Loan or Down Payment
If you’re wondering whether you can buy a house with a credit card because you’re unable to get approved for a mortgage, or if you’re struggling to come up with a down payment, there are some steps you can take to rectify the situation.
With mortgages, for instance, it may be a matter of working to improve your credit before you apply. And if you’re thinking about buying an inexpensive home to fix up and sell, you may consider alternative financing options, such as hard money loans, renovation or rehabilitation home loans, fix-and-flip loans or even personal loans.
[Read: Best Personal Loans.]
“Borrowers who are stretched for down payment funds should consider low-down-payment home loans such as FHA loans,” says Perry, “or use gift funds from a family member if that is an option.”
Alternatively, you may qualify for down payment assistance if you’re a first-time homebuyer and have a low or moderate income. Additionally, some loan programs have no down payment requirement at all, making it easier to get approved without a lot of cash in the bank.
The important thing is that you take the time to research and consider all of your options to determine which will help you achieve your goal without putting your financial security at risk.
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