Why you shouldn't use a credit card to buy a house

If you have excellent credit, you may be able to buy a house with a credit card... but you probably shouldn't.

Buying a house with a credit card sounds impossible, right? It’s not. As long as you have enough available credit to cover the cost, you could borrow the money on your credit card and buy the house outright. But although you may be able to pull it off in certain circumstances, we definitely wouldn’t recommend it.

How to buy a house with a credit card

If you live in a big metro area, especially on the coasts, you may be wondering who could possibly have a credit limit high enough to charge 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 credit score and good income might easily qualify for enough credit to cover such a purchase.

Of course, someone who fits that description would probably also qualify for a mortgage that would cost far less in interest than a credit card would.

But suppose you’re dead-set on using a credit card. You can’t just walk up to the seller and hand them your card. Typically, real estate closings are held at a title company’s 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’t take your plastic either. They 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’d have to get a cash advance, then use that money to purchase a cashier’s check. You would then bring that check to closing, and the house would be yours.

The problem with cash advances

Here’s why we don’t recommend buying a house this way, even if it is technically possible.

Taking a cash advance from your credit card can be very expensive. You’ll pay a fee to withdraw the money — as much as 5%. That means a $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 higher than the interest you pay on normal purchases — which is itself considerably higher than the interest rate on a typical mortgage. And the interest starts accruing the day you borrow the money.

Sometimes, a seller will want to see proof of funds before accepting an offer. That provides some assurance that the deal won’t 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 double-digit interest all the while.

There’s one more obstacle you should know about. Let’s say you have a credit card with a limit of $30,000. You can easily buy an older house in small-town America for that amount. But in many cases, a card’s cash advance limit is lower than its overall credit limit. If your overall limit is $30,000, you might 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’s pretty difficult. You’d have to have excellent credit to have a high enough credit limit, and you’d have to be willing to pay exorbitant fees and interest, and you’d 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 no better way to 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’t fluctuate, and in most cases you can pay the loan off early if you have extra money.

Although there are loans available that don’t require a down payment, it’s 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’t use a cash advance from your credit card to come up with that 20% down payment. Mortgage lenders don’t 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’s likely to raise red flags.

Can you really afford the house?

If you can’t qualify for a traditional mortgage, it may be time to ask yourself why that’s so. You may need to spend some time rebuilding your credit and saving up a down payment before you’re ready to become a homeowner, and leave the creative financing to seasoned real estate investors.

Virginia C. McGuire is a staff writer at NerdWallet, a personal finance website. Email:virginia@nerdwallet.com. Twitter: @vcmcguire.

This article first appeared at Nerd Wallet.