When you’re planning to buy a house, there is more to consider than just the sales price. The home buying transaction itself costs money, as lenders, title companies, appraisers, home inspectors and realtors also have to get paid.
Many of these fees are rolled into closing costs, which typically run anywhere from 2% to 6% of your loan. Common lender’s fees include a loan origination fee, which typically runs about 1% of the loan, and an application fee, which may run about $300. You’ll likely have to pay third parties, too. For example, an appraiser can determine the house’s value and may charge anywhere between $300 and $500.
If the thought of paying all these fees has you wondering where you’ll get the money, you may be considering charging some of them on a credit card. Here’s when you can, when you can’t and how to know if it’s even a good idea.
Expenses you can cover with a credit card
There can be some benefits to putting home buying costs on a credit card, particularly if you can pay the balance in full when the credit card bill is due.
There’s the convenience factor of being able to whip out a credit card to make payments to different parties.
There’s the thrill of racking up rewards if you can score points while fulfilling your home buying dream.
However, both of these benefits lose their appeal if you are paying interest on home buying charges. If you don’t think you’ll be able to pay the entire balance when your credit card bill comes due, think twice (unless you can use a card that offers a 0% promotional rate for a period of time).
While lenders won't allow all home buying goods to be bought with a credit card, the following fees are fair game.
Certain closing costs: There are a number of closing costs that are charged early on in the home buying process, such as credit report fees and appraisal fees. According to Fannie Mae, such costs can be charged on a credit card “because these fees do not represent extraordinary amounts.” However, there is a caveat. Credit card debt is factored in when lenders determine a potential borrower’s debt-to-income ratio. If a borrower has too much debt relative to their income, that could hurt their chances of being approved for a loan.
Home inspection fee: One way to protect yourself during the home buying process is to hire a home inspector who can make sure the house you’re buying doesn’t have major structural damage. A home inspection could cost anywhere between $300 and $500, according to the Department of Housing and Urban Development (HUD). Since the home inspector is a third-party business that may not have a connection to the lender, you will likely pay them directly. As long as they accept credit card payments, you should have no problem using your credit card.
Homeowners insurance: Lenders typically require that you buy homeowners insurance, which can pay for damages or certain losses due to specific risks, such as a fire or storm damage. While some homebuyers choose to pay for their homeowners insurance by setting up an escrow account through the lender, you might also be able to pay your homeowners insurance provider directly. Your insurer may accept credit card payments.
What expenses you cannot cover with a credit card
While you can charge some fees and pay them later, there are other expenses that a lender will not allow you to take care of using a credit card.
The down payment: One of the purposes of the down payment is to cut down on the risk to the lender. From a lender’s standpoint, the chances that a borrower will pay off a loan are greater if that borrower has made a down payment and has some skin in the game. In fact, you’ll likely pay more for your mortgage if you put down less than 20%. Since lenders are factoring in a borrower’s ability to come up with the down payment, paying the down payment with a credit card is a no-no.
Money due at closing: The day you close on your house, you will pay the final costs associated with the loan that are due, such as the remaining loan-related fees, property taxes and the down payment. There are very specific ways that you can pay these final closing costs — and using a credit card typically isn’t one of them. Instead, you can expect to be asked to pay using a wire transfer or some type of certified funds, such as a cashier’s check.
Fees outside of closing that exceed 2% of the loan amount: Fannie Mae issues guidelines to lenders on when they should allow borrowers to pay for home buying costs using a credit card. One of its guidelines is to let homebuyers use a credit card for common fees paid outside of closing up to 2% of the loan amount. That means any costs exceeding 2% of the loan would have to be financed in some other way.
Some borrowers may try to use a credit card indirectly for some of their home buying costs by taking out a cash advance — an influx of cash borrowed against one’s credit limit — and depositing the cash in their checking account to pay the fees. While this strategy may yield some extra cash, it can cause an increase in your debt-to-income ratio and possibly jeopardize the loan. On top of that, cash advances typically come with a higher APR than regular credit card purchases, as well as additional fees.
Alternatives to using a credit card
Any time you use a credit card to pay for home buying costs, you risk a change in your debt-to-income ratio. Some lenders check your credit again prior to closing, and if they notice that your debt-to-income ratio suddenly increases, there is still a chance they could decide not to go through with the loan.
If you’d rather not risk it, there are other options you might consider if you’re trying to come up with home buying funds:
Use cash from a savings account. If you have plenty of savings, it might make sense to use some of that money to pay closing costs and other home buying fees.
Roll closing costs into the loan. Lenders often give you the option of financing some or all of the closing costs. While this allows you to avoid shelling out the cash upfront, consider that your overall loan balance will go up and you’ll be paying interest on the closing costs. Some lenders also charge a higher interest rate if you choose not to pay closing costs upfront.
Accept a gift from a family member. A 2020 study by real estate platform Clever found that 27% of millenials plan to get help from a family member for home buying costs through loans, gifts or inheritances. If your family members can afford to help you, that can be a source of cash.
Take advantage of home buying programs. Ask your lender about down payment assistance programs, which sometimes provide funds that don't have to be paid back. HUD also has a tool that lets you look for programs in each state.