Coming up with a down payment to buy a house can be one of the biggest barriers to many would-be homeowners. While there are many programs out there available to help first-time buyers, you could still find yourself short of the total you need. Investors may need a little more cash to qualify for a fix and flip loan.
If you’ve thought about using your credit card to buy a house, it is possible. Here are some ways you can use plastic to finance a home purchase, and the pros and cons of charging a house.
Down Payment and Closing Costs
It’s possible to use your credit card for a portion of your down payment or to cover your closing costs, but it’s only a good idea under certain circumstances. It’s more common in real estate investing, however.
Because credit cards have limits, you might not be able to use one for 100% of your down payment, but you could cover some of it. You must take a cash advance and then get a certified check at your bank, as title companies don’t accept plastic. Since many sellers require proof of funds for your down payment, you could have to take that cash advance early and pay a lot of interest before you’ve even moved in.
It’s a better idea to use the card to cover some of your closing costs, particularly if they are higher than expected and the deal could fall through at the last minute. You can also pay application fees and other mortgage-related fees with your credit card.
Interest Rates, Credit Cards, and Buying a House
The interest you pay on a credit card will almost always be more than a traditional mortgage. And cards often have lower limits on cash advances and charge higher interest rates and fees on them than the rate charged to purchases. There also is no grace period on cash advances, so it will accrue interest immediately.
If you’re using a credit card to finance the purchase of a rental property or flip, it’s not a terrible idea in the right situation. If the return on your investment would be 20%, and the interest you pay on the card is 12%, the numbers work. Make sure you calculate your return on investment using a blended interest rate of both your mortgage and credit card.
Most credit cards charge rates of 17% and higher. Before deciding to use your card to finance buying a home check on the cash advance rate and any fees. Talk to your buyer’s agent about other options, such as asking the seller to pay part of the closing costs, too.
How will it Impact your Credit?
Any time your balances on your credit cards increase, it negatively impacts your credit. Your credit utilization ratio, which is the amount of credit you’re using divided by outstanding credit available, is a component of your credit score. If you max out a credit card to buy a home, your credit score will take a hit.
If a significant period has elapsed between getting pre-approved for a mortgage and the closing, the lender may check your credit again. A large drop in your credit score could prevent you from getting the mortgage, or change its terms. Since you now represent more risk, the lender could raise your interest rates or require that you pay more interest up-front.
A Clever Partner Agent can help walk buyers through the process and use their experience to help you make better decisions throughout, including financing choices. If you’re on a strict budget and worried about closing costs, agents in our network offer home buyer’s rebates which can help with those costs.
If you’re ready to buy a house, reach out to Clever to connect with an agent in our network.