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This question is about whether the mortgage regulations or rules in USA say anything about using a credit card (or charge card such as Amex) directly for down-payment on a mortgage.

With using it "directly" I mean as not through a cash advance.

I do realize that it may not be a particularly "smart" choice (depending on the interest rate, etc) so this question is not about that aspect. Also I am not currently looking to purchase a house, so this question is merely due to my interest in lending standards.

So, say for example a person could have 3 cards with a combined available credit limit of $30K and he is interested of buying a house.

Could the individual use the credit cards for the down-payment? If he could, are there any negative consequences from doing so (other than probable high monthly payments on the cards)?

  • Too short for an answer, but I will say that your debt outstanding at the time of getting a mortgage is used to calculate your anticipated required monthly payments, which the bank uses to compare against your income, to help ensure you will be able to afford your monthly mortgage payment. – Grade 'Eh' Bacon Jul 14 '16 at 17:40
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Could the individual [directly] use the credit cards for the down-payment?

No, not directly.

Indirectly, either via Cash Advance or "Balance Transfer" to a bank account with a promotional rate could work, however you may have to show the money sitting in a bank account and ready to go before the loan will be approved, which means the money you took out on the credit cards will show up when they pull your credit (unless you somehow timed it perfectly, and even if you did that you'd be breaking the law by lying on the disclosure statement about your current debts.)

If he could, are there any negative consequences from doing so (other than probable high monthly payments on the cards)?

Definitely. Let's assume we're talking about the indirect method of cash advance or balance transfer, since that is actually possible. There are 3 things to compare:

  1. You have saved up enough money for a (hopefully hefty) down payment without taking out any additional loans. This is obviously ideal and should always be the goal.
  2. You do not have enough money for a down payment and simply don't buy a house right now.
  3. You do not have enough money for a down payment, so you take out other loans so that you can buy a house right now. The main negative consequence of doing this is simply that you can't afford the house right now, but for some reason you are buying it anyway. I'm not one to judge; there are contrived reasons where this could be justified (your trust fund comes due soon, your big inheritance is still locked up in probate, your guaranteed bonus is coming soon, etc), but in general, if you think you can pay off the CC debt in the near future, then you're most likely better off waiting until you have the money cash in hand.

Final thought: Most of the time the rate you pay on a non-mortgage loan will be higher than that of the mortgage, and furthermore mortgage interest is oftentimes tax deductible, so it would rarely ever make sense to shift would-be mortgage debt into another type of loan, down payment or otherwise.

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Without using the cash advance feature of your credit card, I'm going to say no. No mortgage lender would let you simply charge the down payment to your credit card.

The reason is the merchant transaction fees. Typical credit card transaction fees that the merchant pays are around 3%. If the lender accepted credit cards on a $30K down payment, they would be giving up around $900.

In addition to that, the whole reason for requiring a down payment is to ensure that the buyer has some equity in their own home. Many lenders will want to know the source of the down payment and will not allow you to borrow this down payment, because they want to ensure that you are not too far into debt. No-money-down home purchases are much more rare than they were 10 years ago.

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    And in addition to the lender's rules, will be rules from the government which may require mortgage insurance to be paid if the downpayment is under (typically) 20%. Do you know whether the US allows non-mortgage debt to be taken on for the purposes of paying a down payment, thereby avoiding mortgage insurance? – Grade 'Eh' Bacon Jul 14 '16 at 17:46
  • @Grade'Eh'Bacon I know in the past it was common to borrow the downpayment and avoid PMI, but I think the rules changed in the last several years. – Ben Miller - Reinstate Monica Jul 14 '16 at 17:49
  • I think the money must be present in accounts for something like 90 days. – Dedwards Jul 14 '16 at 18:07
  • Even FHA loans have a "minimum cash investment" for this very reason. It has to be cash from your account. – Shawn Jul 14 '16 at 18:07
  • The credit card company probably also wants to block this. When I bought my car, I was able to put a down payment on my credit card, but there was a limit to how much. The dealer claimed that the limit was set by the credit card company. I assumed at the time that it was because they didn't want to pay out the cash back. In retrospect, I don't know that to be true and perhaps the dealer lied about who set the limit. – user32479 Jul 14 '16 at 18:10
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You could achieve the same result with a balance transfer with many institutions. Some institutions allow bank accounts to be used as the balance transfer destination (instead of another credit card).

Balance transfers typically have much lower fees than cash advances, and also are typically more readily available during 0% interest promotional periods.

After you receive cash in your checking account it is just as fungible and liquid as any other source of cash.

Making the answer yes.

One caveat being that your credit utilization will also spike, which has the effect of lowering your credit eligibility for the mortgage. But there is a delay of a month or two before that is reported to the credit bureaus, so the time delay mitigates that particular concern.

  • I took the OP's statement "not through a cash advance" to also disqualify balance transfers. But I've never heard of a balance transfer into a checking account; I thought balance transfers just transfer debt from one place to another. Wouldn't a balance transfer into a checking account be a cash advance, by definition? – Ben Miller - Reinstate Monica Jul 14 '16 at 19:28
  • @BenMiller your perception is correct but that isn't how it is implemented by many institutions and many also won't retroactively make that distinction. Some institutions bar checking account numbers, some institutions allow it, and others have it in writing that "you can even send to a checking account". Its all over the place, making the answer yes, very very possible. – CQM Jul 14 '16 at 20:20
  • @BenMiller - just to add to CQM's comment, years ago I did two balance transfers on the same CC, some paid off another CC, and some went straight into my bank account. 12 months later when the promo rate expired, I still had some balance left, and the portion that was associated with the CC payoff changed to the normal rate, and the portion that went to the bank account changed to the higher cash advance rate. – TTT Jul 16 '16 at 13:41

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