Can you buy a house with a credit card? The short answer is yes, you can.
But there are a lot of things in life you can do which are not good ideas, and this is probably one of them.
It’s tempting to buy a house with a credit card when you think of all the points or miles you could earn as part of a rewards or loyalty program.
And it also provides a way to get around the hassle of filling out forms when applying for a traditional mortgage.
But the costs of buying a home using a credit card could hurt your wallet much more than you think and offset any cash back, miles, or points benefits.
Here’s why…
The Cost Of Buying A House With A Credit Card
Buying a home with a credit card isn’t as simple as swiping a card at a grocery store checkout.
You will need to show evidence that you can afford a home downpayment when working with a title company during a home purchase.
That means you will need a cash advance from your credit card.
But cash advances are among the mostly costly financing options. Fees of up to 5% are applied to cash advances, meaning that you could pay as much as $2,500 extra if you needed to show proof of $50,000.
No matter what credit card you look at on the market, you won’t find one that offers special rewards for home purchases.
Even if you could earn 1% and transfer your points to a rewards program to get double the points, you would still end up in the red.
But wait there’s more…
Is It A Good Idea To Buy A House With A Credit Card?
Let’s say you found a great home on Roofstock and you also have a sufficiently high credit limit to put the purchase on your credit card.
The problem is your credit limit is most likely higher than your cash advance limit, which is needed to make the purchase.
Plus, you will start paying interest from the day the cash is borrowed, and it will compound daily.
Worse still, the interest paid on cash advances tends to be higher than the interest rates applied to purchases.
In fact, even if you wanted to use your credit card to make a downpayment, you would run into a brick wall because using debt to finance a downpayment is not permitted.
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Creative Financing Options For Home Buyers
If you are considering a credit card to make a home purchase, other creative financing options may be more suitable.
Seller Financing
When the home seller becomes the lender, you get to avoid traditional lenders altogether.
Instead of paying the monthly mortgage due to your bank, you would deposit funds into the seller’s bank account.
Usually, you will need to agree terms with the homeowner ahead of time like the repayment schedule, interest rate, and the fallout from a default.
FHA Loan
If you don’t qualify for a conventional mortgage, an FHA loan may be an option.
The Federal Housing Administration (FHA) underwrites loans to borrowers who otherwise may not be approved by a traditional lender.
Many traditional lenders offer FHA-backed loans but keep in mind that you will need to pay a 1.75% insurance premium upfront.
Private Mortgage
A private mortgage won’t be an option for everyone but if you have a deep-pocketed friend who is willing to get you on the property ladder, it is one of the best creative financing options for homebuyers.
By loaning you money, the lender may be able to earn a better return on their savings than is available from a traditional bank savings account or certificate of deposit.
And by borrowing from them, you may be able to secure a mortgage at a lower interest rate than what a conventional bank or credit union charges.
To avoid any sticky situations later on in the event of delinquency or default, set out the terms and conditions of the loan ahead of time.
Dip Into Your Retirement Accounts Without Penalty
Normally, you cannot withdraw money from your retirement accounts, like your 401(k) or IRA, until you reach retirement age. Early withdrawals are usually subject to a 10% penalty fee.
But when you are buying a home for the first time as an individual or married couple, you can dip into your IRA to the tune of $10,000 or $20,000 respectively without penalty.
You will need to act fast if you go down this path because the funds you withdraw need to be applied to a home purchase within 120 days of withdrawal or else penalty charges apply.
If you don’t have an IRA but have a 401(k) instead, you can tap into as much as 50% of it, up to a maximum $50,000. But you will need to return the funds to your 401(k) within 5 years or the 10% penalty charge will apply.
Think of borrowing from your 401(k) as an interest-free loan for five years. Unlike an IRA where you can make a penalty-free permanent withdrawal, you must pay back the amount to your 401(k).
Buy An Option To Purchase A Home
Sometimes it makes more sense to postpone the purchase of a home until can afford the downpayment. But what if you are renting a place that you love and want to own it one day?
A creative option for homebuyers in this situation is to propose a “call option” to the homeowner.
The way it works is you “buy a call option” which gives you the right to buy the home at a fixed price by a certain date.
Let’s say you plan to buy the home within the next couple of years, you could propose a deal whereby you pay 2% of the value of the home today and, in exchange, have the exclusive right to buy the home for a fixed price within the next 24 months.
If you decide to buy the home during that time period, your deposit would be credited towards the home purchase.
Of course, if you renege on the deal, the current homeowner keeps the 2% deposit, which you would forfeit.
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Boost Your Credit Score
To avoid buying a home with a credit card or other creative financing options, explore what credit score you would need to get more favorable rates from traditional lenders.
You can visit MyFICO to request a free credit report. Or alternatively, many budgeting apps, like Status Money and Mint, make it easy to access your credit score free of charge.
If your credit score is suffering, check out whether some easy-to-fix issues, like errors on your credit report, are to blame. These can usually be resolved by contacting any of the major credit reporting bureaus: Equifax, TransUnion, or Experian.
Another common cause for a low credit score is too much credit card debt. If you are struggling financially to keep up with credit card payments, consider a 0% Balance Transfer credit card.
Low-balance transfer cards provide a grace period, sometimes as long as 18 months, whereby you pay no interest.
During the period, you won’t benefit from traditional credit card perks, like cash back, points, or miles, but you do buy yourself a runway of time to get into a better financial situation.
The other catch of balance transfer cards is they usually sting you with a fee to move your money, but often this is a lot less than what you would pay in interest charges on your current card, especially if the interest rate is at the high end of the range.
The Bottom Line
Should you buy a home with a credit card? The bottom line is technically you can buy a house with a credit card but the fees you pay for a cash advance may be prohibitively high, so it is usually a better idea to secure a traditional mortgage.
Not sure where to turn? Try out local credit unions, which often have favorable rates, or private lenders like SoFi, who offer mortgages as well as student loans and personal loans.
If you find none of those to be a fit, a creative financing approach to buying a home may be worth exploring as well as big name banks when you have established a good credit score.
Disclosure: Information related to credit cards has been collected by Investormint and has not been reviewed or provided by the issuer of this card.
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