One of the biggest hurdles to homeownership is the down payment.
After all, the typical American has barely anything in the way of savings.
At last glance, the median amount in a transaction account such as checking, savings, or similar was just $8000, per the Federal Reserve.
And for those 35 and under, just $5,400, though the average for this key first-time home buyer cohort is a slightly higher $20,540.
The thing is, the average home today is priced higher than $355,000, meaning those savings won’t go very far.
How Can You Fund the Down Payment for a Home Purchase?
- Checking or savings account
- Money market or CD
- Investment account
- Stock options
- Home equity line of credit (HELOC)
- Home equity loan
- Bridge loan
- Gift funds
- Grants
- Down payment assistance
While we know Americans aren’t the best savers, the good news (I suppose) is you typically don’t need much in the way of down payment to buy a home.
Aside from the many zero down loan programs available, including VA loans and USDA loans, there are also countless down payment assistance programs.
And even if you don’t qualify for one of those, conforming loans backed by Fannie Mae and Freddie Mac require just a 3% down payment.
So on a $355,000 home purchase, you’d only need about $10,650. For FHA loans, the down payment requirement is a slightly higher 3.5%, or about $12,425 using the same example.
In terms of funding the down payment, mortgage lenders are also very flexible, allowing for gift funds in many cases if it comes from an eligible donor, such as a parent or relative. Or even a gift of equity.
If you do happen to provide your own down payment, the options are pretty endless as well.
The funds can come from a verified checking, savings, money market, or CD. Or from stocks or stock options, a retirement account, or the proceeds of a home equity line of credit (HELOC), home equity loan, or bridge loan.
There are a ton of options, but they all require sourcing, and in some cases seasoning to ensure they can be utilized.
But there’s one option that can’t be used for a down payment when taking out a mortgage, and that’s a credit card.
Per Fannie Mae, “Under no circumstances may credit card financing be used for the down payment.”
The same is true for Freddie Mac and the FHA. No credit cards allowed for down payment.
Why Can’t Credit Cards Be Used for a Down Payment?
When it comes down to it, personal unsecured loans, such as a credit card, are not acceptable sources of funds for down payment on a house.
And when you think about it, it makes a lot of sense. Mortgage lenders don’t like the idea of you taking out a loan to qualify for a loan, especially if it’s unsecured, aka not backed by any collateral.
That’s exactly what you’d be doing if you were able to put the 3% down payment on plastic.
You’d wind up with another large liability to accompany your new home loan, which could put you in a precarious position.
It would also put the lender in a risky spot, hence why they don’t allow it. This is why it’s imperative to arrange to have permissible funds available before you apply for a mortgage.
In reality, you should set aside these funds several months in advance to avoid any unwanted scrutiny.
A good rule of thumb is to put the money in a savings account at least two months before you apply for a mortgage. This makes the money “seasoned.”
In addition, it’s wise not to transact in that account during those two (or more) months to avoid unnecessary documentation requests, such as a letter of explanation.
Credit Card Points Can Be Used for Mortgage Down Payment
While you can’t use a credit card for down payment, you can use credit card points!
These days, a lot of folks have amassed a ton of these points thanks to handsome rewards programs from issuers like American Express and Chase.
In fact, it’s not unheard of to have one million points or more if you’ve been playing that game for several years.
And while a cash redemption for your credit card points might not be the best value, it could fulfill some of all of your down payment requirement.
For example, Chase’s Ultimate Rewards can be redeemed at a penny apiece. So if you’ve got say 500,0000 points, they’re worth $5,000.
You could cash them out and they’d be considered acceptable funds for use toward closing costs, down payment, and even reserves if necessary.
The only caveat is that the reward points need to be converted to cash prior to the closing of your loan.
A good plan is to deposit them in a savings account (or similar) several months in advance to avoid additional paperwork requirements.
You Can Also Use a Credit Card for Certain Mortgage Closing Costs
Even if you don’t have credit card points to redeem, a credit card is still permitted to cover certain closing costs associated with your home loan.
For example, Freddie Mac says you can use a credit card to pay for loan origination fees, commitment fees, lock-in fees, appraisal fees, credit reports, and even flood certifications.
But this won’t necessarily do you any favors to free up funds for a down payment.
Why? Because you’re still required to have sufficient verified funds to cover those costs, in addition to any funds required to qualify, such as the down payment.
In other words, you can’t charge those fees on a credit card to pad your bank account.
However, you can still charge them if you want, perhaps to earn points or to defer the cost via a 0% APR card, and they aren’t required to be paid off at closing.
But they will be considered in your debt-to-income ratio (DTI), via a recalculation of your minimum monthly credit card payment.
Long story short, don’t rely on a credit card for any of the mortgage transaction, as it won’t really provide any relief. And if anything, could jeopardize your loan.
The same is true about swiping before you apply for a mortgage. Don’t do it!
Let’s also remember that credit cards have some of the highest APRs around, while mortgage rates tend to be the cheapest debt you can get your hands on.
Read more: Is a mortgage considered a good debt?
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 19 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on Twitter for hot takes.