Why it’s a Bad Idea to Use Credit Cards for Closing Funds

Some title companies (such as those specializing in timeshare closings) accept credit card payments. Their closings are performed remotely, meaning the principals do not appear at the title company in person and the amount due at closing does not exceed most credit card limits. Then why do title companies not regularly accept credit cards as a form of payment at closing? Credit cards are not accepted in a real estate transaction for many reasons.

Here are just a few:

  • Lenders typically do not allow borrowers to extend their debt ratio during the home loan process since extending debt lowers the borrower’s credit score. The home loan approval process requires the borrower to have the down payment and closing costs in hand. Lenders do not want the borrower to have to also borrow the funds needed to close. If the borrowers are not using their own out-of-pocket funds as down payment, they are more likely to default on the loan.
  • Cardholders retain the right to claw back their payment for 90 days. Credit card companies are consumer friendly and allow the cardholder to dispute payments for up to 90 days. This presents a problem because title companies would have to open an account with the credit card company- the credit card company can withdraw any payments transmitted to the title company that their cardholder disputes. That means the title company has to hire and train staff to reconcile the separate account and respond to any disputed payments quickly in order to retain payments.
  • Costly secure software is required to process a credit card payment. In order to process a credit card, the title company would need to subscribe to credit card processing software. The software would have to be maintained on secure workstations and the staff trained to process credit card payments.
  • Funds can take up to four days before they are received. Credit card companies do not remit funds immediately upon charging a cardholder’s card. The funds can take up to four business banking days to show on the payee’s account. Therefore, disbursements would not be able to be made immediately at or after closing.
  • The credit card company deducts their fee from the payment. When the payment is credited to the designated bank account, it is not for the full amount of the charge. The credit card company retains its percentage fee from each transaction. The title company would have to move money from their operating account to the designated bank account in order to make the deposit whole.
  • Down payment and closing costs usually exceed the credit card limit. The average credit card limit is $5,000 while the average down payment and closing costs far exceed the limit, making the use of a credit card to remit payment not feasible.

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