When you know you are going to be tight on cash to close one of the tricks of the trade you can use on conventional loans is putting upfront costs on a credit card to keep more in their bank accounts.

This will help in reducing their cash to close as well as maintain higher balances to verify funds for closing.

Both Fannie and Freddie allow you to pay upfront costs such as appraisal and credit report fees because they are not extraordinary amounts. I would even say possibly pre-paying the insurance for the year outside of closing.

The agencies specifically state that you can use credit card financing for the payment of common and customary fees paid outside of closing allowable up to a maximum of 2% of the loan amount WHEN:

1. You have sufficient liquid funds (reserves) to cover these charges

OR

2. The credit card payment is updated to account for the new charges in the debt to income ratios.

I am thinking option 2 is a good option to be able to use up to 2% on a credit card.

Hopefully, if they have no money, they might have some room in the debt to income ratios to update the credit card.

Just another tidbit of info to give you more options that can make or break their dream of home ownership coming true.

Should I use a credit card for closing cost when getting a mortgage

Using a credit card to cover closing costs on a mortgage generally isn’t advisable. Here’s why:

1. High Interest Rates: Credit cards typically have high-interest rates compared to other forms of credit. If you don’t pay off the balance quickly, the interest can add up rapidly.
2. Impact on Credit Score: Charging a large amount to your credit card can significantly increase your credit utilization ratio, which might negatively affect your credit score. This could impact your mortgage rate or approval.
3. Lender Restrictions: Many mortgage lenders have rules against using credit cards or other forms of revolving credit for closing costs. They often require that the funds come from a verified bank account or savings.
4. Cash Flow Management: Closing costs can be substantial, and using a credit card might lead to cash flow issues down the line if you’re not careful about managing payments and interest.

Instead, consider these alternatives:

• Savings: Use your savings or liquidate investments if possible.
• Gift Funds: Sometimes, lenders allow the use of gift funds from family members for closing costs.
• Negotiation: You might be able to negotiate with the seller to cover some of the closing costs or request a credit from the lender.

Always discuss your options with your mortgage lender or financial advisor to find the best solution for your situation.