With 100 percent home financing virtually unavailable and seller-funded down payment assistance now banned by Congress, the vast majority of today’s homebuyers need to come up with cash for a down payment. In the case of an FHA loan, the minimum down payment is 3 percent of the sales price for the rest of the year; it goes up to 3.5 percent in January 2009. Conventional mortgages will probably require 5 percent or more.
But with a tight economy, Americans are struggling just to keep up with the bills, much less set aside money for a down payment. As a result, lenders are seeing borrowers turn to credit card advances as a quick source of cash — and often finding themselves turned down for a loan as a result because lenders don’t allow down payments to be funded by unsecured loans.
“I hate to see people do that,” says Natasha Cartagena, vice president and branch manager of Shelter Mortgage Company, a subsidiary of Milwaukee-based Guaranty Bank. “When an underwriter sees a $4,000 deposit in a bank account, he has to question it. Some buyers have disqualified themselves doing that.”
It’s difficult to get an accurate reading on how many borrowers use credit card advances to fund a down payment. Since they’re against the rules, most borrowers aren’t going to fess up if that’s the route they’ve taken.
According to the National Association of Realtors, 69 percent of buyers get their down payments from savings, but those “savings” could actually include money from cash advances. Only 1 percent of borrowers surveyed reported getting the money from a financial institution other than a mortgage, and 5 percent reported “other” as the source of their down payment funds. Visa says it does not track what borrowers use credit advances for.
“People do it all the time,” says Gary Parks, a mortgage consultant with NorStar Mortgage Group in Woodstock, Ga. “Technically, they can do it; we don’t encourage it.”
Drew Sygit, a certified mortgage planning specialist at Allied Mortgage in Rochester, Mich., says he’s seen borrowers take a cash advance and give it to a relative, who then gives it back to the borrower so that they can report it as a gift from a family member, which is allowed.
“It’s basically fraud,” Sygit says. “You can’t tell me as a broker that you got your down payment from a cash advance off your credit card.”
For people who are determined to fund their down payments with credit card advances, the only way it will fly with a mortgage underwriter is if the advance is taken out more than 60 days before applying for the loan and parked in a savings account to “season” the funds and avoid scrutiny from a lender, Parks says. Any period shorter than that and a lender is going to need documentation on the source of the funds, such as a gift letter from a family member or a copy of a check from the sale of an asset.
While there may be a way around the rules designed to keep people from doing this, mortgage lenders, personal finance experts, real estate agents, CPAs — basically everyone who deals with money on a regular basis — agree that using credit card advances for a down payment may be the worst idea ever for someone who’s buying a house.
Dumb, dumb, dumb, dumb, dumb.
|— Howard Dvorkin |
Florida credit counselor
“Dumb, dumb, dumb, dumb, dumb,” says Howard Dvorkin, founder of Consolidated Credit Counseling Services in Fort Lauderdale, Fla. “You’re taking a loan that’s costing you probably 24 percent and putting it into an investment that best may appreciate 5 percent. In these times, it may even depreciate. It’s just not a good move.”
Not only are the interest rates on advances incredibly high, but the additional debt from the advance is quite likely to push a borrower over the edge on his debt-to-income ratio, making him ineligible for the loan.
“If you don’t have the money, you shouldn’t be buying a house,” says George Doherty, a former mortgage broker and loan officer who now runs Bankruptcy Survival and Recovery in Las Vegas. “That’s raw, but truly, that’s the way it is. Credit card advances are bad for down payments all the way around.”
See related:Compare sources of home down payment money