One of the main barriers to homeownership is coming with a down payment to buy the house. While there are various grants and loan programs available for first-time home buyers, you may still find yourself short to cover the total costs of securing your home.
One option you may consider to make up the difference is to buy your home with a credit card. But, whether this is a viable option or not is another story. This non-traditional approach to homeownership comes with disadvantages that you should consider before swiping your card.
Key Takeaways
- Buying a house with a credit card is possible, but you will need to do so in a roundabout method because lenders and sellers will not accept direct credit card payments.
- The main reasons for using a credit card are to reap credit card rewards, minimize processes, shorten the repayment period, and pay off loans.
- For most people, using a credit card for homeownership costs is not ideal due to high transaction fees and interest rates, which may offset any benefits. Instead, getting a traditional, fixed-rate mortgage will likely be the most optimal solution.
Breaking Down the Home Buying Process
Due to the high costs of homeownership, most Americans will buy a home by borrowing money through a mortgage loan. A mortgage is secured by the value of the home being purchased, meaning the house itself is used as collateral. All lenders in the mortgage industry must abide by the rules set by Fannie Mae (FNMA), a government-sponsored company, when approving funds for borrowers.
To determine a borrower’s risk level, lenders will check their financial profile, including their income, outstanding debts, and credit score. Once the lender verifies the borrower’s creditworthiness, both parties will decide on a set timeframe to pay off the mortgage and the interest. Usually, borrowers will get a 30-year mortgage with a fixed interest rate, though some may choose a 15-year mortgage to pay off their debt faster.
After the lender approves the mortgage, the funds and borrower’s down payment will get presented to close the deal. The homeowner will then need to make monthly payments on their mortgage or risk foreclosure (the bank takes back your house).
Can I Use My Credit Card to Buy a House?
Unfortunately, you cannot just walk up to a seller and swipe one of your credit cards to cover your home down payment. Real estate holdings often get held at a title company’s office or real estate agency, where the buyer and seller will sign paperwork and transfer ownership of the house. Here, the title company will handle the transfer of funds to complete the sale. They will not accept credit card payments or third-party money-sharing apps like Venmo, nor will sellers and lenders.
Instead, the title company will require certified funds, such as a certified check from your bank, for legal reasons. Additionally, mortgage lenders usually require the funds to sit in your bank account for at least 30-90 days to get “seasoned,” though 60 days is the most common due to Fannie Mae underwriting standards.
Another roadblock you may run into is your credit limit. While some people with a strong credit history and high income may be able to pull this off, the credit limits for most people will not be high enough to accommodate a home down payment, particularly if you are in a high-cost of living area like San Francisco or New York City. If I add up the total credit between all my cards, I can probably only afford to pay down a fraction of the down payment I would need to buy a home in San Francisco!
If you are dead set on using a credit card to purchase your house, you may be able to pull it off, but in a very roundabout way. For example, you could transfer money from your credit card to a friend’s bank account on Venmo and have your friend transfer the funds to your bank account to get them seasoned. But, you may need to deal with significant fees and daily limits in the meantime.
Alternatively, you can take out a cash advance via an ATM withdrawal or convenience check and then use that money to buy a cashier’s check to bring to closing. Note that this method is costly and may not give you much spending power.
The Issue with Cash Advances
While using a credit card through a cash advance is technically possible, we do not recommend taking this costly path. Cash advances usually come with 3-5% withdrawal fees, meaning if you withdraw $10,000, you could end up paying $300-500 in fees. In addition, you will need to pay higher interest rates than on regular credit card purchases and mortgage loans (20%+), which start accruing immediately with no grace period.
Depending on your seller, sometimes they may require proof of funds before accepting your offer. So, you may need to borrow the money in advance to have it sitting in your account to provide assurance, meaning you will pay double-digit interest for longer.
Another obstacle you may run into is your credit limit. In most cases, your credit card’s cash advance limit will be lower than your overall credit limit. For example, if your overall limit is $50,000, you may only be able to take out $20,000 as a cash advance.
While the withdrawal fee may be less than the cost of mortgage application fees and closing costs, there are tradeoffs. You will need to:
- have excellent credit,
- have high credit and cash advance limits, and
- pay high fees and interest.
Comparing Interest Rates
Aside from 0% APR credit cards, most credit cards have exorbitant interest rates, some upwards of 30%. On the other hand, getting a traditional mortgage rate will generally be much lower (think 7% or less as of April 2023). In most cases, the interest and fees you pay from swiping your credit card will be higher than a mortgage loan. Unless you are actively flipping properties for quick profits, the numbers may not work in your favor.
Impact on Your Credit
Whenever you increase your credit card balances, your credit utilization ratio, or the amount of credit you are using compared to your total credit available, will increase, along with your debt-to-equity ratio. Experts recommend using 30% or less of your available credit at any given time. Otherwise, your credit score could get negatively impacted, thus hurting your ability to qualify for favorable mortgage terms due to your increased risk as a borrower from a lender’s perspective.
Reduced Credit Score
When a lender verifies your application, one of the first things they will check is your credit history. Having a higher credit score indicates that you are more likely to repay your debts, making your application more attractive.
If you max out your cards to cover your home purchase costs, your credit score will take a hit, and you will likely have fewer lending options available in the foreseeable future. Lenders will see a massive pile of debt under your name and think twice before approving your loan application. After all, would you loan money to someone knowing they have tens or hundreds of thousands of dollars in credit card debt?
Debt-to-Income Ratio
Another factor lenders look at is your debt-to-equity ratio, which is how much money you bring in every month versus the amount you are paying towards existing debts. If you buy a home with a credit card, you could end up paying monthly payments that are 3x higher than the amount you would pay for a mortgage through your bank.
This can cause your debt-to-income ratio to skyrocket and your credit score to drop, making it harder for you to qualify for loans in the future. From a lender’s point of view, if you have too many existing debts, you may prioritize paying those off over your monthly mortgage payments.
Maxed Out Card
If you max out your credit card to pay for your house, credit card companies may flag your account for suspicious activity. Most credit card companies actively monitor consumer activity, so if they see anything out of character or bizarre, they may lower the limit on your account.
Additionally, because you used all your available credit, you will not be able to access the credit line in case of emergencies. Hopefully, you will have an emergency fund or sinking fund to prepare for those scenarios. But, if you don’t, you could put yourself in a tight spot financially.
When Buying a House with a Credit Card Makes Sense
The more important question you should be asking is not can you buy a house with a credit card, but is it a good idea for you? If you can pay off your balance immediately, using a credit card could work out. But if you do not have the means to pay off your card promptly, it may make more sense to get a mortgage.
Credit Card Rewards
Many credit cards offer reward points, miles, or cash back for swiping. If you are trying to rack up rewards for an upcoming trip or other big-ticket expense, then putting a large bill on your card, such as a mortgage, will help you hit your goals faster. But, keep in mind that you will need to pay this balance off quickly or risk accruing a lot of interest.
Fewer Processes
When you apply for a mortgage, you will have to deal with tons of paperwork, appraisals, and additional fees. When you use a credit card to purchase a house, you can eliminate closing costs and application fees related to your mortgage.
Paying Off a Loan
If you have paid down most of your mortgage principal and only have a small percentage of the balance left, you may want to use a credit card to pay off the remaining balance. That way, you will officially own the deed and house, and no bank can foreclose on your property or make you pay escrow. If you get a 0% APR credit card, you can use the introductory period to pay off your house at no interest for a year or so.
Shorter Repayment Period
If you can afford to make your credit card payments regularly, you can pay off the balance you owe for your home much faster using a credit card instead of taking out a mortgage. That is because, in the early installments of your mortgage payments, most of it will go towards the interest you owe rather than the principal.
Partial Payment
We’ve been talking about using your credit card to buy a house as a zero-sum game, but you do not need to use it to pay for everything. You can partially finance your home with your credit card. For example, if you are short a few thousand dollars to cover your down payment or closing costs, you can use your card to make up the difference. You can also use it to pay for inspections, a real estate attorney, homeowners insurance, moving costs, etc.
Alternative Financing Options
While this path sounds boring, financing a house with a traditional, fixed-rate mortgage will probably be the best bet for most people. For the duration of your mortgage payment period, your interest rate gets locked in. So, your monthly payments will not fluctuate, giving you stability and predictability. You can also choose to pay off your loan early if you have extra cash flow.
Depending on your mortgage lender, some will let borrowers use credit cards for their mortgage payments through a third-party payment service. While these services typically charge a fee, you may profit if your rewards exceed the transaction cost. If you really want to collect credit card rewards, this is a viable option to consider.
Are You Going to be House Poor?
If you do not qualify for a traditional mortgage loan or have enough money to cover a home down payment (usually ~20% of the home price), you should ask yourself why you do not qualify and if it’s the right time to buy a house. Maybe, your credit is not doing so hot, or you do not have enough money saved up.
If you feel the need to borrow money at high-interest rates to close on a house, you might not be ready to be a homeowner. Buying a home is a major expense. For many people, this will be the biggest expense of their life! It comes with many responsibilities, including property taxes, house repairs, monthly mortgage payments, etc. So, before committing, make sure it is the right decision for you, and you will not have any regrets. The last thing you want when your financial circumstances are unstable is more debt on your plate.
The Bottom Line
Buying a house with a credit card is possible, but that should really be your last option unless you have calculated all the risks carefully and employed creative financing solutions to pay off the debt. Before going all-in with this option, talk to friends and family who have closed on a house recently. Alternatively, you can speak to an expert, such as an accountant, tax attorney, or financial advisor, for the best financing options for your financial circumstances.
