Can You Secure a Mortgage With an Unsecured Credit Card?

A common question some borrowers ask is if they can secure a mortgage with unsecured credit cards. The simple answer to this question is no. Unsecured credit cards are not backed by collateral, making them a risky investment for lenders. When applying for a mortgage, you must thoroughly understand why unsecured credit cards are not an ideal fit for collateral. This read will walk you through all the backing factors to give you an idea.

Crucial Reasons Why Mortage Cannot Be Secured With Unsecured Credit Cards

Unsecured installment loans can be problematic for lenders. They do not have a security to rely on. When borrowers apply for loans, they provide proof of financial security or collateral to establish a win-win ground for both parties. Here is what you should know about unsecured credit cards.

They Are Not a Stable Form of Collateral

Credit cards are offered by banks to ease the financial burden on account holders. They bridge the gap between your payday and expenses by keeping the financial loop running. Each credit card comes with a fee that you must pay to enjoy the privileges. Failing to meet the bank’s requirements can lead to hefty penalties and legal proceedings.

When you apply for a mortgage, you must provide a security to the lender to validate your case. The security serves as the collateral if you fail to pay back the loan. For instance, if you have a property as collateral, the lender will legally be right to acquire it if you fail to pay back loans as promised.

Since credit cards are not backed by collateral, they are not valid for securing a mortgage. You may seek a financial consultant’s help to analyze your options before securing a mortgage.

They Have Higher Interest Rates

Credit cards have higher interest rates compared to mortgages. When you apply for a credit card, the bank develops an agreement based on its policies to ensure you agree to the terms and conditions of the use. One of the terms is interest rates. Based on your bank’s policy and your credit history, the bank may decide on a percentage (interest) as a fee for offering you the privileges.

On the other hand, mortgages are secured loans with lower interest rates. When you rely on credit cards to secure a mortgage, the higher interest rates of credit cards may hinder the lender’s financial security. Simply put, credit cards can be riskier to offer as collateral when securing a mortgage.

You may consult a financial expert to analyze the variation of interest rates and decide on the best form of collateral for mortgage security.

They Are Not Good for Your Credit Score

Another factor that makes unsecured credit cards a bad option for securing a mortgage is your credit score. Suppose you find a way to use your credit cards for mortgage security. To pay back the loan, you may max out on your credit card’s limits. Such steps will put you in a difficult situation financially. It will also impact your credit score directly.

Some borrowers overlook the long-term importance of credit score maintenance and rely on credit cards to pay off their debts. While they sometimes succeed in clearing the mortgage, they block all the doors to securing a mortgage in the future.

The impact of maxing out your credit cards on your credit score is greater than you might expect. You may consider other options before relying on credit cards for mortgage payments.

They Are Not a Decent Way to Diversify Your Investments

Unsecured installment loans can put you in financial constraints. A mortgage is a secured form of loan backed by collateral. The financial safety makes it a relatively safer investment than unsecured loans. When you rely on an unsecured loan to secure a secured loan, you may completely risk your financial stability.

Credit cards (unsecured) are not backed by any asset or property to serve as collateral. They place a direct burden on the borrower to pay off interest and loans instead of collateral. This means that you may not be able to diversify your investments when relying on credit cards for securing a mortgage.

Seeking assistance from a financial expert may help you decide on the best options for diversifying investments and securing mortgages.

They Always Have the Inflation Risk

Inflation is a major influencing factor when aiming to secure a mortgage. Typically, mortgages have fixed interest rates, meaning they remain unaffected by inflation. The fixed-rate makes it relatively convenient for borrowers to ensure their financial stability and pay back the amounts as promised.

On the contrary, unsecured credit cards typically have variable interest rates. They bear the direct impact of rising inflation, affecting the interest rates on your loans. When you rely on credit cards to secure a mortgage, you put yourself in a major risk based on the variable interest rate. Credit cards are designed such that they benefit the bank more than the users.

Considering this factor may help you compare your options and choose wisely. You can always consult experts or your friends caught in a similar situation to determine the best option.

Important Tips to Qualify for Mortgage

To help you qualify for a mortgage, we have covered a few quick tips below.

Save for Downpayment

Save up for your house’s downpayment to create a good impression on the lenders. Putting a 20% downpayment shows seriousness to commitment and a sense of responsibility.

Work on Your Credit Score

Improve your credit score to qualify for a mortgage. Some ways to do it are by paying bills on time, lowering your credit utilization, and avoiding getting new credit cards.

Work on Your Debt-to-Income Ratio

Work on your debt-to-income ratio to keep it below 43%. Most lenders prefer facilitating borrowers with lower debt-to-income ratios.

The Takeaway

The above factors may be useful when planning to secure a mortgage with unsecured credit cards. You may thoroughly evaluate each part to know the pros and cons of each. If it is you are having trouble making the right decision, Fetch a Rate can help you. Feel free to compare your loan options on the website to get the one that fits your needs.