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 most of today's buyers are millennials, 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 is generally not a good idea because of the 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.
• Many options exist for a home purchase without a credit card.

Understanding the Home Buying Process

Most Americans choose to borrow money (in the form of a mortgage loan) 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 secured by real estate collateral, meaning the value of the home being purchased.

A lender will look at a borrower's financial profile, like their income, debts (i.e., credit cards, student loans, auto loans, etc.), and credit score to establish 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, 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 borrowers fail to make regular payments, they risk foreclosure (when the bank reclaims your house).

Read What You Need to Know Before You Buy Property in New York to learn more about the home-buying process.

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, must follow the same 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 substantial limits, as the traditionally accepted amount is 20% of the home purchase price.

This will have to be extracted as cash advances and converted to a cashier's check as down payments are required to be guaranteed funds.

See also How Do Escrow Accounts Work?

Cash advance fees (3%-5%) and interest as high as (20%) don't make financial sense as you get into a bottomless hole before starting-.

You could avoid the interest charges, which could be astronomical with such a massive 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.

When applying for that mortgage, having a lot of debt on your plate may exclude you from qualifying for one.

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

The Benefits Of Using Your Credit Card To Pay Your Mortgage

You might want to make your mortgage payment with a credit card because 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 cards more heavily.

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

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 your most significant payment, probably by far.

Putting thousands of extra dollars onto your credit card could push your debt ratio above 30%, the recommended cap for keeping your credit score healthy.

Your credit score will suffer if you continually use more than 30% of your credit limit.

Also, if you float a balance on your credit card or make a late payment, you risk significantly 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, most of which do not allow making mortgage payments with your credit card.

You will need to check with each one individually to be sure 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 make it, you could end up with a late mortgage payment, adversely affecting your Credit.

If you find that your credit card or lender does not allow credit card payments, another solution is possible via something called manufactured spending.

What is manufactured spend?

Manufactured spending sounds complicated, and it can be. Still, at its core, it's a digital concept - use your credit card to purchase a cash equivalent, like a gift card, effectively turning your Credit into hard cash.

To pay 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. That sounds convoluted and time-consuming, but it's a surefire way to use your credit card to make monthly mortgage payments.

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

If manufactured spending sounds too tricky, then Plastiq might be your company.

Plastiq steps in as the middleman 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 relatively 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 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 suits 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 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.

You hire A home inspector independently, so you can choose an inspector or inspection company that takes Credit.

Appraisal fees

Your lender usually sets up an appraisal when they contact an independent appraisal service to appraise the value of the home to be purchased.

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

Attorney fees

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

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

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

Homeowners' insurance

You must purchase homeowners' insurance from your mortgage lender to receive the loan commitment and present them with the proof of purchase.

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

Moving and furnishing costs

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

HOA or maintenance fees

Many New York City co-ops and condos allow you to pay 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 increases 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 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 an actual 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, do not use more than $300 monthly. This 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 handy but can become dangerous when you leave a balance on your card and build on it each month.

Credit card interest can be punishing, and once 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 significantly on your credit report and shows 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 opening a card in your name.

Request a credit increase periodically.

This will make it easier to keep your credit utilization below 30% and show your bank that you can handle more significant 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, programs can help you.

The Fannie Mae High-LTV Refinance Option (HLRO) is designed to help borrowers refinance underwater loans into more manageable loans 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 entirely suspend mortgage payments for borrowers facing unemployment.

This program is available for borrowers with FHA loans who 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

Specific programs are also available to help those struggling in New York State.

Home prices can be challenging to stomach in New York City. Luckily, there are programs available if you fall behind on your payments.

Programs like the Homeowner Protection Program (HOPP) and the 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 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 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 if you're finding it difficult.

Borrowing From Friends and Family

The simplest 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 some things to remember before asking for help.

You must verify your relationship with the gift giver, proving they are family members or close friends.

More than likely, the gift giver will have to verify their funds. This means submitting bank statements to your lender to show they 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 departure.

You must 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 withdrawals.

It's also possible to take out a loan from the account, which you must repay with interest, but no penalties or fees are associated.

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.

A co-signer is someone whose 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 a weak credit and financial profile, are just starting a career, and 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 regular payments. A guarantor mortgage best suits applicants with a low deposit, someone with a weak credit score or no credit profile, and a borrower who seems like they can't afford the property on their own.

There are a few significant 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, your co-signer or guarantor's strong Credit will override your lower Credit.

Lenders use the debt-to-income ratio (DTI) to judge borrowers' financial profiles. 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 better positioned 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 or lower interest rate.

If your co-signer or guarantor has a higher income than you, your payments 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 significant 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 massive part of your life, so learning how to 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, and maybe even move to a cheaper apartment!

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 ensure you are on top of everything.