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So, you’re a fan of credit card points. You mastered the system and have enjoyed free flight upgrades, cash back, and the occasional gift card on your credit card issuer’s dime. Now, you want to up the ante and rack up as many points as possible when you make your next big purchase—a home.
While you can technically buy a home with a credit card, there will be some hurdles to jump over and the process won’t mirror how you usually use your credit card.
Read on for a breakdown of your options if you want to buy a home with a credit card.
Can I use my credit card when buying a house?
Those who live in high cost-of-living areas may find the idea of buying a house with a credit card absurd. Who has a credit limit that high? It’s important to remember that in some parts of the country, you can buy a fixer-upper for $10,000 to $30,000. In some cases, consumers do have credit limits high enough to pull this off.
For example, with the Visa Signature card, the highest credit limit you can access is $500,000 (although the average consumer is likely to tap out at $50,000). It’s not unreasonable to think that someone with a strong credit history and solid income would qualify for a credit limit large enough to buy certain types of homes.
Let’s say you get past the credit limit issue. Can you buy a house with a credit card? Sort of. You can’t just hand your credit card to the seller and hope to buy a home like you would buy eggs at the grocery store. Most often, real estate closings occur at either a real estate agency or title company’s office, and that’s where you sign the papers to transfer the ownership of the house. The title company is the party that handles the transfer of the funds necessary to complete the sale.
This is where you’ll hit a roadblock if you want to pay with a credit card, as title companies require certified funds like a certified check from a bank. They don’t accept credit cards. To pay with your credit card, you would first need to work with your credit card company to get a cash advance. When you take a cash advance from a credit card to buy a home, you will pay a fee (as high as 5%), but that fee will likely be a lot less than the combined costs of mortgage application fees and closing costs. Once you have the cash advance, you’ll purchase a cashier’s check that you will bring with you to closing.
Pros and cons of home buying with a credit card
It’s fair to wonder why someone would choose to buy a house with their credit card instead of a more traditional mortgage loan. Let’s examine both the advantages and disadvantages of credit card usage in this context.
Pros of using a credit card
- Avoid additional fees. Mortgages come with additional fees that increase the amount you’ll spend on a home purchase. You will avoid both mortgage application fees and closing costs when you use a credit card to buy a home.
- Skip the paperwork. When you apply for a mortgage, you need to be ready to fill out a lot of forms and gather a lot of documents for your application. When you use a credit card, you don’t need to jump through any lender hoops and will avoid that paperwork.
- Shorter repayment timeline. Assuming that you can afford to make your credit card payments on time, you’ll pay off the money you owe for your home much faster when you use a credit card than when you take out a mortgage loan. That’s because in the early months and years of mortgage payments, your payments mainly go towards the interest, not the principal.
Cons of using a credit card
- Debt-to-income ratio. Buying a home with a credit card often comes with higher monthly payments than you would get with a mortgage—likely three times higher. Having higher monthly payments can hurt your debt-to-income ratio, which is an important factor to keep in check if you want to have a strong credit score.
- Reduced credit score and less lending options. That reduced credit score will hurt your future lending options and will make it harder to qualify for home loans. Even if you do qualify, it’s more difficult to get the best rates and terms.
- Maxed out credit card. Chances are, when you buy a home with a credit card, you’ll max out your credit limit and won’t be able to use your credit card until you make payments. A lack of credit limit also hurts your credit score.
Should you buy a house with a credit card?
Sometimes the important question to ask is not can you buy a house with a credit card, but should you? If you’re able to pay off your credit card immediately, you may benefit from this move.
It’s worth noting that the concept of doing this assumes that you can get a large enough cash advance to pay for the home. In many cases, you can’t take a cash advance out that is as large as your credit limit. For example, you may have a $30,000 limit, but the credit card issuer may only allow you to take a cash advance of $10,000.
If you go the credit card route, you may need to take out a cash advance just to make an offer, as many sellers want to see proof of funds before they accept an offer — especially in a seller’s market where competition is steep. This means you have to borrow money from your credit card before you even place an offer on a home, and your interest payments will begin to mount while you wait for your offer to be accepted and to close on the home.
If you can’t pay off your credit card promptly, this is where it makes much more sense to go with a mortgage loan, as they tend to have drastically lower interest rates than credit cards.
Try your mortgage payments instead
If you really want to make the most of your credit card rewards, you can take out a traditional mortgage loan and then use your credit card to make your mortgage payments instead.
While it’s not accepted across the board, some mortgage lenders do allow borrowers to make mortgage payments via credit card if they utilize a third-party payment service. These services tend to charge a fee for usage, but if your earned credit card rewards exceed the fee, you may profit.
The truth is, a credit card is not the way to go when it comes time to purchase a home for the average home buyer. If you live in a small town and have your heart set on an older fixer upper, it may be possible, but most will find a traditional mortgage loan better suits their needs.