You need to put money down on your home, but you don’t have enough cash handy. You may have thought about using your credit card, but is that even allowed?
Technically, you can’t use your credit card to make a down payment on a home. But, there is a way around it.
You’ll Need a Cash Advance
While you can’t whip out your plastic and assume you can use it to make your down payment, there is one way you can make it happen. You can take out a cash advance.
If you go this route, we recommend that you do it several months before you need to verify the funds. Lenders want to see seasoned funds – or funds that have been in your bank account for at least two months. That’s the reason they ask for two months of bank statements. If they see a sizeable deposit in your bank account during that time, they will need to know where it came from and if it’s a loan.
If you take the cash advance before then, though, the lender won’t need to trace the origination of the funds. While technically, you took out a loan to get your down payment, the lender will figure the payment into your debt ratio already. They use the minimum required payment for your credit cards as reported on your credit report. As long as the cash advance has already taken effect and is reporting on the credit report, the lender will figure it into your debt ratio.
Reasons to Be Careful
So now that you know it’s possible to use a credit card for a down payment on a home, you need to know if it’s worth it. As you probably know, you’ll pay hefty interest charges on the balance. If it is going to take you a long time to pay the balance off, you could end up paying thousands of dollars in interest. Is it worth it?
You also need to watch your debt ratio. As we discussed above, the minimum payment for your credit card will report on your credit report. Depending on the agreement with your credit card company and the amount you borrow, that amount can be fairly high. You’ll have to see how it affects your debt-to-income ratio. Your DTI is a big part of your qualifying factors. If it’s too high, you could lose your mortgage approval.
Even if you don’t lose your mortgage approval, there is a chance that you won’t qualify for the size mortgage that you need. Again, you’ll have to see how things play out. You’ll need to know the minimum required payment if you take out the cash advance. You’ll also need to know how it affects your debt ratio. If it’s too high, one suggestion a lender may have is to lower your loan amount. This will decrease your DTI and could help you buy a home.
Using a credit card for a down payment on a home isn’t the best option, but it can work. If you have exhausted all other resources to get the money for your down payment, you may consider it. Just make sure that you consider all angles of the transaction. Think about how long it will take you to pay it off, how much interest you will pay, and how it will affect your ability to borrow the loan amount that you need.