Can You Use a Credit Card to Buy a Home in New York City?

With its round-the-clock eateries and bustling real estate market, New York offers no shortage of options. However, why should the unique choices end there?

Consider the process of buying a home or paying off your mortgage. While the majority of today's buyers are millennials, the prospect of purchasing a house may seem out of reach or less glamorous than traveling the globe.

What many lenders won't tell you, however, is that paying your mortgage with a credit card can benefit your credit score and earn you valuable rewards.

To get started, let's cover the basics.

Using a Credit Card to Buy a Home

• You might want to use a credit card for mortgage payments to reap credit card rewards.
• Due to regulation, homeowners are not technically allowed to remit mortgage payments by credit card.
• However, there are ways you can indirectly use a credit card to make mortgage payments, which include third-party vendors like Plastiq.
• Using a credit card for the down payment or mortgage payments are generally not a good idea because of high transaction fees involved, which may outweigh any rewards.
• You can still pay for other home-buying related-expenses such as inspections, appraisals, attorneys, insurance and moving costs.
• There are still many options for paying for a home purchase without the use of a credit card.

Understanding the Home Buying Process

Most Americans choose to borrow money (in the form of a mortgage loan) in order to buy a home.

After all, it is often the single most expensive purchase they will make in their lives, and very few people have the cash in the banks to pay for it in one shot.

A mortgage is a loan that’s secured by real estate collateral--meaning the value of the home being purchased itself.

A lender will look at a borrower’s entire financial profile, like their income, debts (i.e. credit cards, student loans, auto loans, etc.), and credit score to establish if they are trustworthy borrowers.

The borrower and lender agree on a set timeframe to pay off the mortgage, usually 30 years, and what kind of interest rate works best for them and, generally fixed or adjustable.

After a lender approves a borrower, the funds are presented at the closing table along with the borrower's down payment.

The borrower (now homeowner) begins making monthly payments on their mortgage.

If a borrower fails to make regular payments, they risk foreclosure (when the bank reclaims your house).

To learn more about the home buying process in detail, read What You Need to Know Before You Buy Property in New York.

Fannie Mae (FNMA), a government-sponsored company, establishes the lengthy set of rules that the US mortgage industry abides by when approving borrowers and funding mortgages.

Every lender, from the local mom-and-pop lender to Bank of America, has to follow the same set of rules to be FNMA or Fannie Mae approved.

Can You Use Your Credit Card To Pay Your Down Payment?

If you don't have the funds to put money down on a house, you're probably not ready to purchase a home.

Fannie Mae (FNMA) does not allow you to pay your down payment with your credit card.

While it is technically possible to work your way around the rules and use your credit card for money down, you'll find yourself hitting a lot of roadblocks and problems.

You will most likely require credit cards with very large limits as the traditionally accepted amount is 20% of the home purchase price.

This will have to be extracted in the form of cash advances and converted to a cashiers check as down payments are required to be guaranteed funds.

See also How Do Escrow Accounts Work?

Cash advance fees (3%-5%) and interest being as high as (20%) they are, don't make financial sense as you are digging yourself in a very deep hole before you've even gotten started.

You could avoid the interest charges, which could be astronomical with such a huge sum of money, by transferring your balances to a 0% credit card.

But even after doing this, you may find yourself between a rock and a hard place.

Having a lot of debt on your plate when you go to apply for that mortgage may all but exclude you from qualifying for a one.

Debt-to-income ratios or DTI is one of the main standards by which lenders will judge your worthiness to receive a mortgage.

The Benefits Of Using Your Credit Card To Pay Your Mortgage

A big reason why you might want to make your mortgage payment with a credit card is that credit card rewards are based on how much you use it.

Be it in the form of points, miles, or cash back, most credit cards give back to their users for using their card more heavily.

If you are trying to rack up miles for an upcoming trip or simply gather more points to exchange for cash back, then putting large monthly bills on your card, like your mortgage, is a great way to quickly hit your goals.

Another great benefit is it can buy you time in dire situations.

If you are short on money to pay your mortgage until your next payday, your credit card can help you stay ahead for a short time until you can afford to pay it off.

The Risks of paying your mortgage with your credit card

Though the rewards can be lucrative, there are risks to watch out for.

Your mortgage payment is likely the largest payment you have, probably by far.

Putting thousands of extra dollars onto your credit card could push your debt ratios above 30%, which is the recommended cap for keeping your credit score in good health.

If you continually use more than 30% of your credit limit, your credit score will suffer.

Also, if you float a balance on your credit card or make a late payment, you’re at risk for greatly lowering your credit score and possibly being charged harsh fees.

How to make monthly mortgage payments with your credit card

Your mortgage lender, card network (e.g. Visa), and card issuer (e.g. Chase) all operate under different sets of rules, the majority of which do not allow making mortgage payments with your credit card.

You will need to check with each one individually to be sure if you can safely use a credit card for your payment.

Check thoroughly with each company to ensure they accept credit card payments.

If you make a credit card payment and one of them doesn’t accept it, you could end up with a late mortgage payment, which adversely affects your credit.

If you find that your credit card or lender does not allow credit card payments, then there is the possibility of another solution via something called manufactured spend.

What is manufactured spend?

Manufactured spend sounds complicated, and it can be, but at its core, it’s a simple concept - use your credit card to purchase a cash equivalent, like a gift card, effectively turning your credit into hard cash.

In terms of paying your mortgage, you can use your credit card to purchase prepaid debit cards, use the debit cards to purchase a money order, and then use the money order to pay your mortgage.

Now take a deep breath. I know that sounds convoluted and time-consuming, but it’s a sure-fire way to use your credit card to make your monthly mortgage payments

What are some other ways you can pay a mortgage with your credit card?

If manufactured spend sounds a little too difficult, then Plastiq might be the company for you.

Plastiq steps in as the middle man who will take your payment via credit, and then pay your mortgage lender directly. Essentially, they complete the manufactured spending process for you.

It’s a fairly simple solution for a complicated issue.

Risks with using Plastiq

The catch with Plastiq is they charge a 2.5% fee on every payment they make for you.

And on a loan the size of a mortgage, that is no joke.

The median home value for all of New York City is around $650,000.

The average interest rate for a buyer with good credit and a 20% down payment is about 4.125%.

That means a standard monthly mortgage payment in NYC is around $3,192. If you paid your mortgage with Plastiq for an entire year, you would pay nearly $1,000 in fees (that’s $73 a month!).

It’s up to you to decide if paying the fees makes sense for your situation.

In addition to the interest charge, there are two potential issues to watch out for with Plastiq.

They can take up to 8 days to process your payment. This can be a big deal if you don’t schedule your payment far enough in advance, so be careful to check that you don’t incur any late fees.

Another thing to consider is that your credit card’s rules can change regularly. Some credit card companies might read Plastiq’s transaction on your card as a cash advance when they didn’t the month before, which might come with some stiff fees.

What Can I Pay for With a Credit Card When Buying a Home?

Believe it or not, there are still plenty of ways you can use plastic during the home purchasing process.

Inspection fees

While not a requirement, an inspection is always a good idea for the home buyer to do so they know exactly what they are getting themselves into before they make their big purchase.

A home inspector is hired independently by you, so you can choose an inspector or inspection company that takes credit.

Appraisal fees

An appraisal is usually set up by your lender when they contact an independent appraisal service to come an appraise the value of the home to be purchased.

The appraisal company will charge a fee, which must be paid by the home buyer. Feel free to use your credit card here.

Attorney fees

New York State is an attorney state, so early on, you should bring on a real estate attorney on your side to help you along with your contract and closing.

Not all law firms or practices take credit cards, but you can definitely find ones that do.

Read on: Why You Need a Real Estate Attorney in New York.

Homeowners' insurance

You will be required to purchase homeowners' insurance by your mortgage lender in order to receive the loan commitment and present them with the proof of purchase.

You can easily use your credit card with the insurance company and policy of your choice at this step.

Moving and furnishing costs

Hiring a moving company and buying furniture for your new place is another great opportunity to rack up reward points on your credit cards.

HOA or maintenance fees

Many New York City co-op and condos actually allow the possibility of paying your monthly maintenance costs by credit card.

Payment portals like ClickPay are becoming the norm, and allow you the perfect chance to rack up more points.

Ways to Pay For a Home Purchase Without a Credit Card

Start your credit history or improve your Credit

Home values keep rising and the cost of living rises with it. Every day it becomes harder to afford the jump into homeownership.

So many issues are bundled into the problem that we can’t address here, but we have some simple tips that can help raise your credit score and make it easier for you to qualify to borrow money.

First, apply for a credit card if you don't have one.

It can be scary to move to credit if you’re only used to using a debit card, but if used responsibly, a credit card is the most essential tool for building credit.

If you are starting from scratch credit-wise, the best strategy is to get a secured credit card.

You give the bank a deposit upfront that secures the card and acts as collateral if you miss a payment.

This is a fantastic way to establish credit and slowly build up to obtaining a real credit card.

Be mindful of your balance and usage.

Keep your credit usage at or below 30%. For instance, if you have a credit card with a $1,000 limit, then be sure to not use more than $300 per month. Which leads to the next tip…

Always pay your credit card off by the end of your billing cycle or more than the minimum payment.

A good rule of thumb is to pay more than twice the minimum payment.

Credit cards are incredibly useful, but they can become dangerous as soon as you start leaving a balance on your card and building on that balance each month.

Credit card interest can be punishing, and once you’re caught in the cycle it can be a nightmare to escape.

Pay your loans consistently. This includes auto loans, mortgages, student loans, etc. Every loan in your name reflects greatly on your credit report and shows that you are a responsible borrower.

If you can, become an authorized user on your parent’s credit card. This will give you a credit history for banks to rely on without having to open a card in your name.

Request a credit increase periodically.

This will make it easier to keep your credit utilization below 30% and shows your bank that you can handle larger amounts of credit.

To learn more tricks and tips on improving your credit, read How to Improve Your Credit and Get Approved.

Mortgage relief programs

If you already have a mortgage but are facing substantial financial troubles, there are programs available to help you out.

The Fannie Mae High-LTV Refinance Option (HLRO) is designed to help borrowers refinance underwater loans into a more manageable loan with a lower risk of foreclosure.

You can learn more about the program and eligibility requirements here.

The Home Affordable Unemployment Program (UP) is designed to reduce or fully suspend mortgage payments for borrowers facing unemployment.

This program is available for borrowers with FHA loans that already qualify for unemployment.

You can learn more about this program and other programs HUD offers and how to apply here.

Mortgage programs for New York residents

There are also specific programs available to help those struggling in the State of New York.

We all know that home prices can be tough to stomach in New York City. Luckily there are programs available if you start to fall behind on your payments.

Programs like Homeowner Protection Program (HOPP) and New York State Mortgage Assistance Program (MAP) support loan modification, homeownership counseling, or obtaining secondary loans to help with property tax arrears.

If you are a new homebuyer, The State of New York Mortgage Agency (SONYMA) offers programs designed to offer lower interest rates and assist with down payments, home repairs, and remodeling.

Their primary programs are called Achieving the Dream and Low-Interest Rate. You can learn more about both of those programs here, on their website.

Help With Your Down Payment

Coming up with enough cash to pay for a hefty down payment can be a challenge, but there are options to make it easier on you if you’re finding it difficult.

Borrowing From Friends and Family

The most simple solution is to receive the money for a down payment as a gift from family or friends.

No gift tax will be applied on gifts under $15,000, thanks to an exemption from the IRS.

Though it’s a pretty simple process, there are a couple of things to keep in mind before asking for help.

You will have to verify your relationship with the gift giver, proving that they are indeed a family member or close friend.

More than likely the gift giver will have to verify their funds. This means submitting bank statements to your lender to show they do in fact have the money for the gift.

Your lender will also confirm that there is no intention of repayment. The money cannot be given as a loan, only a gift.

Using Your Retirement Accounts

You might have the money already in your retirement funds. Roth and traditional IRA accounts are the ideal accounts for withdrawing extra cash.

Withdrawals up to $10,000 are penalty-free, granted that you spend the money within 120 days of withdrawal.

You will have to pay taxes on the money you withdraw from a traditional IRA account, but a Roth IRA issues no penalties or taxes.

If your money is in a 401k, you will likely have to pay a 10% fee for any money that you withdraw.

It’s also possible to take out a loan from the account, which you will have to repay with interest, but there are no penalties or fees associated with it.

The risk of pulling money out of your retirement funds is that some accounts will require you to pay the money back within five years. This added debt could hurt your chances of qualifying for a good loan.

Getting A Co-Signer or Guarantor

The best thing about getting a mortgage is that you don’t have to do it alone. You can bring in a co-signer guarantor to be on the loan with you.

A co-signer is someone who’s name is on the mortgage next to yours. They are equally responsible for regular mortgage payments. A co-signer can be extremely helpful if you have weak credit and/or financial profile, are just starting a career, and/or have a low down payment.

A guarantor is a silent partner in your mortgage. They help you qualify and are only responsible for your payments if you fail to make your regular payments. A guarantor mortgage best suits applicants with a low deposit, someone with a weak credit score or no credit profile, and/or a borrower who seems like they can’t afford the property on their own.

There are a few major ways that adding a co-signer or guarantor can give your application a boost.

We’re assuming your co-signer or guarantor has good or excellent credit - otherwise they probably shouldn’t be on your loan with you.

If you have low or no credit, then your co-signer or guarantor’s strong credit will override your lower credit.

Lenders use something called the debt-to-income ratio (DTI) to judge a borrower’s financial profile. It’s exactly what it sounds like: your lender will review all your monthly income and compare it to your monthly debt (credit card payments, loan payments, etc.).

A lower DTI is better because it indicates you are in a better position to take on more debt. If your DTI is too high, bringing on a co-signer or guarantor with a low DTI can help you qualify for a higher mortgage amount or a lower interest rate.

If your co-signer or guarantor has a higher income than you, your incomes can be combined to help you qualify for a more favorable loan.

To learn more read, Can a Co-signor or Guarantor Help You Get a Mortgage?

Don't Use a Credit Card for Home Buying Costs If You Don't Have the Money

It's one thing if you are trying to maximize reward points on your card to get fully paid-for vacations.

However, it is never a good idea to use a credit card at any step of the way just because you don't have the money at hand.

Buying a home itself is a major expense. Using a credit card when you don't have the money will only put you further in debt.

Mounting debt could cause you to fall into real trouble.

Chase Your Dream

Your mortgage is a huge part of your life, so learning how to best manage it is essential. There are things you can do now to help prepare yourself for homeownership.

Talk to your friends and family who have bought recently.

Save money where you can - eat out less, skip that weekend trip, maybe even move to a cheaper apartment for a bit!

Pay attention to mortgage rates and the real estate landscape. Rates can fluctuate, so timing is everything.

Most importantly, keep track of your money and payments to make sure you are on top of everything.