Homeownership has long been the American dream, but with a changing real estate landscape it has turned into a dream deferred for so many. Rising interest rates, skyrocketing home costs, and stagnant wages have created a massive affordability problem for those who simply cannot come up with the funds they would need for a down payment or to cover their closing costs.
Some mortgage companies have capitalized on these issues and created programs and products aimed at helping these borrowers, like a new credit card program from Rocket Mortgage that allows users to receive cash back that can be applied to future closing costs. But is it ever a good idea to take on additional credit card debt right as you're getting ready to apply for a mortgage? We talked to the pros to find out what they think about this program and others like it — and what you can do instead.
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Meet the Experts
Can a Credit Card Really Help With Closing Costs?
When it comes to whether a program like this would work, Zach Wain, broker and owner, Wain Capital, says the answer is unfortunately not as simple as a yes or no. "The most popular credit card that gives reward points towards closing costs is offered by Rocket Mortgage," he says, adding that the company's program sounds like an amazing opportunity on paper. "The reward point system seems very high at five points per dollar spent," Wain says. With this, the average US household would generate $1,254 in closing costs credit after one year of spending, according to USA Today.
That may sound like easy (and free!) money, but Wain says prospective buyers need to keep the bigger picture in mind. Using cards like these means you're forever tied to the lender backing the card when it comes time to use those cash back benefits — for example, you wouldn't be able to carry those Rocket Mortgage rewards over to Chase Bank when it comes time to close — and you could find yourself stuck with a company with higher interest rates and closing costs than you'd find if you were able to shop around. That means you could actually end up overpaying in the long run.
Wain also points to a recent Housing Wire article that showed using a mortgage broker over a retail lender can save borrowers more than $9,400 on their mortgage. "Saving $1,254 to get charged $9,400 more does not sound like good math to me."
For someone who needs to use one of these cards to come up with the upfront money they need to close, that may not matter as much. But for someone who is looking at cold hard numbers, the math unfortunately may not add up.
There’s Also the Additional Debt
Of course, there's also another angle to consider when using a credit card to build up rewards: debt. Using your plastic to cover daily expenses (or worse, to splurge on items you can't really afford to begin with) is rarely a good idea when you're trying to get your credit profile in shape to buy a new home.
That being said, Ari Rastegar, founder and CEO of the Rastegar Property Company, says that charging some of the items from your household budget can be a good idea if it's done the right way. "If you do this prudently and you use it to have your down payment and you are very responsible in how you pay it off, it's a fantastic tool," he explains, adding that you'll have to make sure you're not over leveraging yourself in the process.
That may mean using the card to cover the things you already have money set aside for so that you can pay it off quickly to avoid carrying a monthly balance and racking up those expensive interest charges.
You Don’t Need a Mortgage-Specific Card to Use This Savings Hack
If you think you're in a good financial situation to use a credit card to boost your savings, Rastegar says there's more than one way to go about it. "The alternative is a non-mortgage affiliated card," he says, explaining that savvy shoppers can even search for credit cards that are independent of any banks or lenders
To make a cash-back card work more in your favor for a down payment savings, Wain says you should shop around and find a creditor with a robust points system. "Get a Capital One Venture card, Chase Sapphire, or similar cards that offer flexible redemption choices, and use a local mortgage broker for your home purchase/refinance and the savings will be drastically higher."
Talk to Your Lender
Banks and mortgage companies often have strict rules about any funds used to purchase a home. Typically any money that is being used as part of a mortgage transaction will have to be sourced (this means you'll need to be able to verify where it came from to prove that you won't need to repay any of the funds) and it will also have to be seasoned (which means it will need to have been in your bank account for a certain amount of time).
If your lender suddenly sees a large deposit to your account they'll likely ask you for the paper trail, something Nikki H Bernstein, team lead, associate broker, and Realtor® with The NikkiB Group, says could slow down your approval process or even halt it all together. "The lender needs to know where the 'instant cash' came from since money does not ordinarily fall out of the sky," she says, adding that they'll also need to confirm that the credit arrangement won't impact your debt-to-income (DTI) ratio at all.
"On the other hand, if the buyers have fantastic credit scores and low DTI ratios, this could be an interesting way to generate the 'instant cash' needed to purchase a home," she continues. "Regardless of what I think, I would recommend the buyers consult with a lender to learn the best avenue to take without risking their ability to borrow the lion's share of the money from the bank."
Using a credit card to build a savings account may not be the best practice for everyone but it seems like the pros we spoke to think that it can be a good option when done the right way.