Why you shouldn't use a credit card to buy a house
Buying a house with a credit card sounds impossible, right? It鈥檚 not. As long as you have enough available credit to cover the cost, you could聽borrow the money on聽your credit card and buy the house outright.聽But although you may be able to pull it off in certain circumstances, we definitely wouldn鈥檛 recommend it.
How to buy a house with a credit card
If you live in a big聽metro area, especially on the coasts, you may be wondering who could possibly have a credit limit high enough to聽charge聽an entire house. But there are still many areas where you can buy a fixer-upper for $30,000, $20,000 or even $10,000. Someone with a long credit history, excellent聽credit score and good income might easily qualify for enough credit to cover such a purchase.
Of course, someone who fits that description聽would probably also qualify for a mortgage that would cost far less in interest than a credit card would.
But suppose you鈥檙e dead-set on using a credit card.聽You can鈥檛 just walk up to the seller and hand them your card. Typically, real estate closings are held at a title company鈥檚 office or real estate agency. The buyer and the seller, or their representatives, sit down to sign papers and transfer ownership of the house. The title company also handles the transfer of funds.
Title companies, though, won鈥檛 take your plastic either. They聽require certified funds, meaning you need a certified check from a bank.
So how would you use a credit card to buy the house? You鈥檇 have to get聽a cash advance, then聽use that money to purchase a cashier鈥檚 check. You would then bring that check to closing, and the house would be yours.
The problem with cash advances
Here鈥檚 why we don鈥檛 recommend buying a house this way, even if it is technically possible.
Taking a cash advance from your credit card can be聽very聽expensive. You鈥檒l pay a fee to withdraw the money 鈥� as much as 5%. That means聽a聽$10,000 withdrawal would cost you $500, just to borrow the cash from your credit card.
On top of that, interest rates on cash advances are usually聽higher than the interest you pay on normal purchases 鈥� which is itself considerably higher than the interest rate on a typical mortgage. And聽the interest starts accruing the day you borrow the money.
Sometimes, a聽seller will want to see proof of funds before accepting an聽offer. That provides some assurance that the deal won鈥檛 fall through. So you might have to borrow the money from your credit card early so that you can show it sitting in your account, as you pay聽double-digit interest all the while.
There鈥檚 one more obstacle you should know about. Let鈥檚 say you have a credit card with a limit of $30,000. You can easily buy an older聽house in small-town America聽for that amount. But in many cases, a card鈥檚聽cash advance limit is lower than its聽overall credit limit. If your overall limit is $30,000, you might聽only be able to take $10,000 out as a cash advance.
So while it is possible to use a cash advance for this purpose, it鈥檚 pretty difficult. You鈥檇 have to have excellent credit to have a high enough credit limit,聽and聽you鈥檇 have to be willing to pay exorbitant fees and interest,聽and聽you鈥檇 have to check to see whether your cash advance limit is lower than your overall credit limit. All that, when there are better options out there.
More traditional financing options
It sounds boring, but there is probably聽no better way to聽finance a house than with a traditional fixed-rate mortgage. Your interest rate is locked in for the duration of the mortgage, meaning your payments won鈥檛 fluctuate, and聽in most cases you can pay the loan off early if you have extra money.
Although there are loans available that don鈥檛 require a down payment, it鈥檚 a good idea to put down 20% if you can. Doing so will allow you to avoid paying for mortgage insurance.
And, no, you can鈥檛 use a cash advance from your credit card to come up with that 20% down payment. Mortgage lenders don鈥檛 like to see you take on new debt right before you buy a house, and because a cash advance carries such high interest and fees, it鈥檚 likely to聽raise red flags.
Can you really afford the house?
If you can鈥檛 qualify for a traditional mortgage, it may be time to ask yourself why that鈥檚 so. You may need to spend some time rebuilding your credit and saving up a down payment before you鈥檙e ready to become a homeowner, and leave the creative financing to seasoned聽.
Virginia C. McGuire is a staff writer at聽, a personal finance website. Email:virginia@. Twitter:聽.
This article first appeared at .
