Can You Use a Credit Card for a Down Payment or Other Homebuying Costs?
There are a few reasons you might want to make a down payment with a credit card. Perhaps you want to take advantage of credit card perks, such as cash back, travel points or even free Uber Cash. Or maybe you found your dream home and don’t want to let it slip away, but you don’t have enough cash for a down payment at the moment.
Regardless of your motivation, it’s not uncommon these days to wonder if you can cover a down payment with a credit card. Usually, the answer is no. There may be some workarounds if you’re intent on using your credit card, but they may not be the best choices either. Let’s review.
Difficulty in Using a Credit Card for a Down Payment
Chances are, you won’t be able to just walk up to a seller, hand them your credit card, and voila! — your down payment is covered. That’s because buying a home is quite a bit more complicated than buying a sandwich for lunch — even if we wish it were just that easy.
One of the biggest hurdles here is mortgage lenders usually require you to have your money sitting in a bank account for 60 days before you can use it for a down payment. This requirement alone means paying for a down payment with a credit card the way you normally would isn’t possible.
So, there you have it. Making a down payment on a home with a credit card isn’t really possible unless you can convince the mortgage lender to waive the waiting period. However, there are some possible workarounds to this obstacle.
Two possible workarounds are using a payment app or requesting a cash advance. In both cases, you use your credit card to gain access to cash because the lender probably won’t allow you to make your down payment on credit.
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Payment apps like Venmo, PayPal and Apple Pay let you send cash using a credit card. With this method, you would have to send the money to another account — such as to a family member — then have them send the cash back to you.
However, there are caveats to this. Payment apps usually have a limit on how much cash you can send — anywhere from a limit per month to a limit per transaction. In addition, while you can usually send money using your debit card or in-app cash balance with no fees, sending money with a credit card usually comes with a fee. The typical fee is 3%.
Another way you might be able to access cash using your credit card is with a cash advance. Credit cards often allow cash advances, which is effectively a loan against your card’s cash advance limit. However, cash advance limits are usually different from purchase limits — often much lower. In other words, the amount of money you can request via cash advance may be much less than what you need for a down payment.
The other caveat is that, just like payment apps, cash advances usually have fees of 3% to 5% just for requesting the money. However, cash advances also come with interest since they are effectively loans. But the APR for cash advances can be even higher than the APR for purchases. Hence, you could end up paying a significant amount of interest if you don’t repay the balance quickly.
Paying for Other Homebuying Costs With a Credit Card
Buying a home is a long and arduous process, and the sticker price isn’t the only cost involved. Other fees include closing costs and fees associated with the purchase itself. However, you can’t pay for these costs with a credit card either, says Isaac Tebbs, head of growth at Millions.
However, Tebbs notes there are some homebuying costs you can cover with a credit card. For example, you can pay for inspections and insurance costs with a credit card. You might be able to pay your mortgage with a credit card, although it isn’t guaranteed, and there will be additional fees.
If there are other costs you would like to cover with a credit card but aren’t sure if it’s permitted, you can always ask. The worst you can be told is “no.”
Pros and Cons of Using a Credit Card While Buying a Home
Using a credit card when buying a home has pros and cons, says Lyle David Solomon, principal attorney at Oak View Law Group.
One pro, when paying your mortgage for example, is you might be able to avoid some fees. “Mortgages have extra costs that drive up the price of a home,” Solomon says. “In case you’re using a credit card for the purpose, you will not have to pay any closing costs or mortgage application fees.”
You can also potentially pay off your mortgage sooner. “This is because, during the first few years of making mortgage payments, your funds are primarily used to pay off the interest and not the principle,” Solomon says. This does assume you are paying for the entire house with a credit card — such as a $25,000 fixer-upper in a rural area.
One potential con (and this is a big one) is that using a credit card to buy a home could hurt your credit score, as it could drive up your credit utilization. As a result, it could hurt your future borrowing opportunities.
“Your future lending possibilities may suffer if your credit score takes a hit, and it will be more difficult for you to qualify for house loans,” Solomon says. “You will find it harder to get the best deals even if you do manage to qualify.”
This strategy will also increase your debt-to-income ratio, which will make you appear riskier to lenders. “The monthly payments for purchasing a property using a credit card are typically three times more than those for a mortgage,” Solomon says. “Higher monthly payments might harm your debt-to-income ratio, which is something you should keep under control if you intend to maintain a good credit score.”
The long and the short of it is — using a credit card for major costs associated with homebuying is not common, and for good reason.
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