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It is possible to pay bills with a credit card. Using a credit card in this way can help you earn rewards like cash back and travel points.

But it’s not always the right financial move. Keep reading to learn what bills you can pay with a credit card and how using a credit card to pay bills works.

Can You Pay Bills With a Credit Card?

Yes, it is possible to pay certain bills with a credit card. However, using a credit card responsibly is key.

When using a credit card to pay bills, it’s important to make sure doing so won’t cause you to rack up a high balance. Paying bills with a credit card makes the most sense when you can easily pay off your credit card balance in full right away.

If done responsibly, a card holder can earn credit card rewards — like cash back, travel points, and gift cards — for spending on purchases they have to make every month without paying interest. Plus, making regular, on-time payments can help build your credit score.

When Should You Not Use a Credit Card to Pay Bills?

As great as the potential to earn rewards is, if someone can’t afford to pay their credit card balance, charging their bills can lead to high interest charges and late fees (which are two ways credit card companies make money).

It also might not make sense to pay bills with a credit card if it leads to paying an extra fee from the merchant.

What Bills Can You Pay With a Credit Card?

There are limitations on which bills you can pay with a credit card. And, as briefly noted earlier, you may owe a fee for using a credit card to pay bills, which could outweigh the benefits earned.

Here are 10 examples of bills you can pay with a credit card, as well as explanations on how paying these bills with a credit card works.

1. Streaming Services

The vast majority of streaming services accept credit card payments to cover the monthly cost of the subscription. To pay this bill with a credit card, all you’ll need to do is enter their credit card number on the streaming service’s website. The card will then automatically get charged each month unless you cancel or suspend your membership.

It’s unlikely any streaming service will charge an extra fee for using a credit card to pay for their subscription.

2. Utilities

Some utilities providers allow credit card payments, so it’s worth investigating this option to determine if it’s accepted. If your utility provider will take a credit card payment, then setting it up is usually as simple as providing your credit card number when you pay your bill online, over the phone, or through the mail. You can often set up autopay as well.

However, watch out for the additional convenience and processing fees that some providers may charge. Higher bills are more likely to offset this fee given the greater earning potential for credit card points or other rewards.

3. Cable

Cable is another bill you can pay with a credit card. To determine how to do so, you’ll want to consult your cable provider. You may be able to enter your credit card number on the online payment portal or provide this information over the phone. Setting up autopay is also usually an option with a credit card.

There is typically no additional processing fee to pay cable bills.

4. Phone

Another bill you might pay with your credit card is your phone bill. You can likely set this up online on your phone provider’s website or by giving them a call. If you’re unsure of how to pay bills with a credit card, simply consult your phone provider.

You’ll typically face no additional processing fees.

5. Internet

Your internet service is another bill that you can cover using your credit card. As with other utilities and services, consult your internet provider if you need assistance getting this set up. In general, however, you can do so through your online payment portal. If you don’t want to go through the legwork each month, you can usually set up autopay with your credit card.

Most internet providers won’t charge an additional processing fee to pay your bill with a credit card, meaning those costs won’t cut into any rewards you earn with a cash back credit card or other type of rewards credit card.

6. Rent

Most landlords don’t allow credit card payments, but there are third-party solutions that can allow someone to pay their rent with a credit card. This includes services such as Plastiq and PlacePay, which act as intermediaries.

However, you’ll generally pay a convenience charge or other fees. You’ll want to assess whether the benefits of using your credit card to pay rent outweigh the costs.

7. Mortgage

Mortgage servicers generally don’t allow credit card payments. However, there are third-party payment processing services through which you could pay your mortgage. Still, some credit card issuers may prohibit you from paying your mortgage through these services.

In addition to restrictions, you’ll want to look out for processing fees. These could cancel out any rewards you could earn from covering your mortgage with a credit card.

8. Car Loan

Just like mortgage services, most auto lenders also don’t accept credit cards for loan payments. If you do find an auto lender who’s willing to accept a credit card for payment, you’ll likely face a hefty processing fee.

Additionally, credit card interest rates tend to be higher than those of auto loans, so if you’re not confident you could immediately pay off your credit card balance in full, you could simply end up paying a lot more in interest.

9. Taxes

It is possible to pay some taxes with a credit card. The IRS allows you to pay on its website using a credit card. However, you’ll face a processing fee ranging from 1.82% to 1.98%, depending on which payment processor you select. If you opt to pay using an integrated IRS e-file and e-pay service provider, such as TurboTax, your fee could range even higher.

10. Medical Bills

While you can pay medical bills with a credit card, it might not be the most cost-effective option. This is because credit cards can charge high interest and fees, and there’s the potential to damage your credit score. Many medical providers may offer interest-free or low-interest payment plans, or a personal loan could offer a lower rate than a credit card.

If you do think the rewards and convenience of using a credit card is worth the risk, the process of paying bills with a credit card will vary by medical institution. Before charging your medical bills to a credit card, you may want to at least try to negotiate medical bills down.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score

Benefits of Paying Bills With a Credit Card

There are a few key benefits associated with paying bills with a credit card.

1. Ease of Payment

It may be possible to pay a bill with a credit card online, in an app, or over the phone.

2. Easy to Prove Payment

If a payment dispute arises, paying by credit card is an easy way to keep a record of payments.

3. Identity Theft Protection

If either a credit card or someone’s personal information gets stolen, a credit card issuer will pay back some or all of the charges.

4. Autopay

It’s easy to use a credit card to set up autopay for bills so you never accidentally forget to pay them.

5. Can Build Credit History

Given how credit cards work, using a credit card to make payments and then paying that balance off on time and in full can help build your credit score.

6. Earn Rewards

Purchases made with a credit card helps earn cash back and credit card points.

Downsides of Paying Bills With a Credit Card

There are also some downsides to paying bills with a credit card that are worth keeping in mind.

1. May Cost More

Because many bill services charge fees to pay with a credit card, it’s possible to spend more than necessary on processing fees.

2. Can Lead to High-Interest Debt

If someone can’t afford to pay off their credit card balance after using it to pay for bills, they can end up with high-interest debt on their hands.

3. Processing Fees Can Cancel Out Rewards

It’s important to do the math to make sure that the cost of processing fees isn’t canceling out the cash back you’re earning with the purchase.

4. Leads to Another Bill to Pay

Similar to when you pay a credit card with another credit card, paying a bill with a credit card simply leads to another bill to pay. This can cause more hassle than it’s worth.

5. Can Hurt Credit Utilization Ratio

Carrying a higher balance on a credit card can lead to a higher credit utilization ratio, which is damaging to credit scores. One of the common credit card rules is to keep your utilization below 30%, meaning you’re not using more than this percentage of your total available credit at any given time.

Recommended: What Is a Charge Card

Guide to Using a Credit Card to Pay Bills

At this point, it’s clear that it is possible to pay some bills with a credit card. But should you? In short, it depends.

If the bill provider won’t charge a processing fee and the consumer can afford to pay off their credit card balance in full, then paying their bills with a credit card is a great way to earn rewards and build a credit score.

However, in many cases, the processing fee some merchants charge can outweigh the value of cash back or other rewards earned. Not to mention, carrying a credit card balance can lead to incurring expensive interest and fees.

The Takeaway

It is possible to pay some bills with a credit card, but doing so can lead to paying costly processing fees or even accruing interest charges. It’s important to crunch the numbers to see if paying a bill with a credit will result in earning enough rewards to justify any processing fees.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

Should I put non-debt bills on a credit card?

If someone can afford to pay off their credit card balance in full and the processing fee they’ll owe isn’t, it can make sense to put a non-debt bill on their credit card. They just have to remember to then pay their credit card bill to avoid owing any fees or interest, which could undercut the potential benefits.

Is it wise to pay monthly bills with a credit card?

Paying monthly bills with a credit card can lead to processing fees in some scenarios. If someone won’t owe a fee, they can benefit from earning cash back by paying their bills with a credit card. This can be a savvy move to make if they can afford to pay off their credit card bill in full each month, thus avoiding interest charges.

Is it better to pay bills with a credit or debit card?

Paying a bill with a credit card can lead to earning rewards, which a debit card can’t offer. There’s also often purchase protection. However, if you’re worried about handling credit card debt responsibly, you may opt for using a debit card, as this will draw on money you already have in your bank account. With either a debit or credit card, however, you’ll want to look out for fees.

Should I pay off my credit card in full or leave a small balance?

It’s always best to pay off a credit card balance in full if possible before a credit card’s grace period ends. The grace period is the time between when the billing cycle ends and your payment becomes due. You won’t owe interest as long as you pay off your balance in full before the statement due date. Otherwise, you could owe interest charges and fees.

What happens if you pay the full amount on your credit card?

Paying the full amount on a credit card makes it possible to avoid paying interest. After a credit card is paid off in full, the consumer can simply enjoy the rewards they earned by making purchases with their credit card.

Does paying a bill with a credit card count as a purchase?

Yes, paying a bill with a credit card does count as a purchase. This makes it possible to earn cardholder rewards like cash back when paying bills.

Photo credit: iStock/Damir Khabirov

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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In some cases, the IRS (Internal Revenue Service) does consider credit card rewards taxable income and in some cases, they don’t tax earned rewards. Confused? Don’t worry: Read on to learn when credit card rewards are taxable income and when they aren’t.

What Are Credit Card Rewards?

To better understand how credit card rewards are taxed, it can help to know what credit card rewards are. When a consumer uses a credit card they may earn different credit card rewards, such as points, cash back, and airline miles.

Depending on their redemption value, these rewards can be worth up to hundreds if not thousands of dollars. Your cardholder agreement should outline the credit card rules for how to earn rewards using a specific credit card, as well as how to redeem them.

How the IRS Treats Credit Card Rewards

In some cases, credit card rewards are taxable; in other cases, no. Take a closer look at which types of rewards and in which scenarios credit card rewards are counted as taxable income by the IRS.

Rewards Treated as Rebates on Spending

Luckily, cash back rewards and other rewards like miles or points aren’t considered taxable income when earned by making purchases. The IRS considers these types of rewards as rebates, discounts, or bonuses rather than income.

The trick is that the cardholder has to spend a certain amount to earn a reward in order for the IRS to not classify the rewards as income. For example, if a new credit card offers $200 in cash back when the cardholder spends $2,000 within the first six months of opening their account, that $200 would not be considered taxable income.

Rewards Considered as Income

Certain rewards are considered income. The way to identify which rewards are taxable income is by looking at how they’re earned.

As mentioned previously, if someone spends money to earn rewards, those rewards won’t be taxed. If, however, someone is given a $150 gift card simply for signing up or referring a friend for a new credit card, that $150 is viewed as taxable income — because they didn’t spend any money to earn it.

When Are Credit Card Rewards Taxed?

Again, credit card rewards that aren’t earned through spending (such as some introductory bonuses) can count as income that the IRS will expect the cardholder to pay income taxes on. Some scenarios in which credit card rewards may get taxed include:

•   If you received a sign-up bonus simply for opening a credit card or account

•   If you earn a reward for referring a friend

When Your Credit Card Rewards Are Taxable

As briefly mentioned above, any monetary rewards that a cardholder didn’t earn through spending can be considered taxable income.

Let’s look at how this can work with two different credit card bonus offers. If a cardholder is offered $100 if they spend $1,500 in the first three months of having their account open and they spend enough to earn that bonus, that reward won’t count as taxable income. On the other hand, if a cardholder is offered a $100 gift card simply for opening their new account, they will need to pay income tax on the $100.

When Your Credit Card Rewards Are Not Taxable

As briefly mentioned above, credit card rewards aren’t considered taxable income if someone spends money to earn them. When a cardholder acquires the rewards (cash back, travel miles, etc.) through purchases, then those rewards are classified as a rebate or a bonus, not taxable income.

For instance, this may include:

•   Sign-up bonuses that require meeting a spending threshold

•   Rewards earned from credit card spending

•   Miles earned through travel

Are Business Credit Card Rewards Taxable?

It doesn’t matter if the rewards are earned with a personal credit card or a business credit card — the same rules surrounding income taxes apply.

Where business credit cards can affect taxes is when it comes time to take tax deductions. For example, if someone bought $2,000 worth of equipment for their business and earned $40 in cash back rewards doing so, they can only deduct $1,960 on their taxes. In other words, they can only deduct the net cost of business expenses, which cash back reduces.

How to Know If You Owe Taxes on Credit Card Rewards

It can be hard to keep track of how much taxes are owed on credit card rewards. If someone earns a bonus without having to meet a spending requirement, the credit card company might send the cardholder an IRS Form 1099: either a Form 1099-INT or Form 1099-MISC specifying the amount of income they earned.

Whether or not you receive this form, however, you’ll need to report the bonus on your income taxes. To make doing this easier, it can be helpful to keep track of any bonuses not earned through spending. That way, if the credit card issuer doesn’t send a Form 1099-INT or Form 1099-MISC, you can still complete your taxes properly.

Reviewing old statements to look for statement credits in the form of cash back or other types of rewards can be helpful.

Recommended: How to Pay Taxes With a Credit Card

Avoiding Taxes on Your Credit Card Rewards: What to Know

To avoid taxes on credit card rewards, all the cardholder has to do is not seek out credit cards that offer bonuses for simply signing up for the credit card. If the rewards are earned through spending, they won’t run into any taxes, thus allowing them to pay less tax.

The Takeaway

In general, taxes only apply to rewards that don’t require any spending to earn. If you’ll owe taxes on your rewards, the credit card issuer typically will send a Form 1099-INT or Form 1099-MISC specifying the amount of income you’ve earned and will need to report.

Being smart about credit cards and their usage is about more than just rewards, however.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

Are credit card cash back rewards taxable?

Only credit card rewards that cardholders receive without having to spend money to earn them in any way are considered taxable income. If a cardholder earns cash back for spending money using their credit card, it won’t count as taxable income.

Are loyalty points taxable?

If someone spends money to earn loyalty points (such as purchasing airline tickets), they won’t have to pay taxes on those points. If, however, they received the points simply for signing up for a credit card, that would count as taxable income that they’ll need to report.

Are credit card rewards reported to the IRS?

In some cases, yes, credit card rewards are reported to the IRS. When this happens, the credit card company might send the cardholder a Form 1099-INT or Form 1099-MISC specifying the amount of income they earned that they’ll need to report.

Do you have to pay taxes on credit card rewards?

Cardholders need to pay income taxes on credit card rewards they didn’t need to spend money to earn. If they had to spend money to earn a reward, such as cash back, that won’t count as taxable income.

Photo credit: iStock/Grayscale Studio

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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If you unintentionally overpay your credit card bill, you may see a negative balance on your account. Although overpaying a credit card isn’t ideal — that cash flow could’ve been used toward another expense, after all — it’s usually not cause for concern.

If you overpaid your credit card, interest isn’t charged on the amount; in fact, that amount is owed back to you. What you do next, whether that’s requesting a refund or applying the overpayment to next month’s bill, is your choice.

How Credit Card Overpayments Happen

Since credit cards work by providing you with revolving purchasing power up to your limit, any activity on the account can change your available balance — even after you’re issued a monthly billing statement. This includes new purchases on the account that increase your credit card balance, but also payments or credited amounts that lower the outstanding amount you owe.

If you end up making a payment to your credit card issuer for a higher amount than you owe, for instance, it results in an overpayment. This is also called a negative balance.

Recommended: When Are Credit Card Payments Due

How You Could Have Overpaid Your Credit Card

There are a few circumstances that might result in an overpaid credit card.

Manual Payments

Submitting a manual credit card payment for an amount that’s higher than your actual outstanding balance will push your account into a negative balance. This might happen if you’ve been repaying a large purchase in equal increments each month, but make a math error or have an oversight.

For example, say you used your new 0% APR credit card to purchase a laptop for $2,150 and plan to make manual monthly payments of $500. By month five, you’d only need to make a $150 payment to pay off your card balance. But if you forget what your current balance is, you might accidentally make another $500 payment. The $350 difference would be an overpayment on your account.

Paying attention to your outstanding balance on the day you plan on making a manual payment can help you avoid overpayment.

Additional Payments on Top of Automatic Payments

You might also overpay credit card balances if you made a payment to avoid credit card interest charges, but didn’t realize that you already had autopay enabled on your account.

The scheduled automatic payment will still be processed, regardless of any manual payments, unless you cancel it for the month. For this reason, a double payment can result in an overpaid credit card.

Before making an extra payment, double-check whether you’ve enacted autopay and see how another payment might affect your outstanding balance.

Recommended: How to Avoid Interest On a Credit Card

Receiving Refunds

Another common scenario resulting in an overpaid credit card is if you return a purchase to a merchant or get a refund for a service. If the amount of the purchase was credited back to your credit card and you make a payment based on what’s shown on your statement balance that arrived before this transaction, you’ll overpay your credit card bill.

If you returned an item and received a refund back on your card, remember to adjust your manual payment or autopay to reflect your new balance due.

Guide to Rectify Overpaying Your Credit Card

Now that you know what happens if you overpay your credit card, you may be wondering if there’s anything you can do to fix it. If your credit card balance is under $0, and you’re owed money back, there are a few ways to move forward.

Request a Refund

The Fair Credit Billing Act (FCBA) protects your rights when it comes to how your credit card account is handled. It states that you have the right to request a refund if you overpay your credit card by more than $1.

The credit card rules state that the issuer must give you a refund in the payment method of your choosing within seven business days of receiving your request. Additionally, it must, in good faith, make attempts to return unapplied overpayments that have been on the account for over six months.

When requesting a refund by mail, make sure to send your request through certified mail so you have proof of the date it was received by the bank.

Allow the Negative Balance to Roll Over Next Month

Another way to address a negative balance on a credit card is simply to do nothing. If you don’t explicitly request a refund, the bank will automatically roll over the unapplied credit toward your next statement balance.

If you have a larger statement balance than your credit during the following month, the overpayment credit will be applied and the remaining balance you owe is reduced. However, if your credit is greater than your new statement balance, your adjusted credit amount will roll over again.

It will continue this way until you’ve effectively used all of your account’s overpayment credit or you ask for a refund.

Enable Autopay on Your Credit Card

If you’re not already enrolled in automatic payments, enabling autopay for your credit card bill can help prevent overpayments due to manual payment errors. Leveraging your card’s autopay feature is a responsible way to use a credit card since it ensures you pay the correct amount on your account on time.

If you set up autopay to always pay your statement balance or outstanding account balance, it also helps you avoid credit card debt that’s getting increasingly harder to pay off.

Does an Overpaid Balance Affect Your Credit Score?

Having an overpaid credit card balance is better than having a positive balance on your account. Credit card companies report negative balances as a “zero balance” when forwarding your card activity to the credit bureaus.

A zero balance lowers your credit utilization, which impacts your credit score calculation. Although it can build your credit compared to carrying an outstanding balance, the effect of an overpayment is the same as making a payment for the correct amount to reflect that you owe $0. In other words, it won’t help you build your credit score.

The Takeaway

Although overpaying credit card balances is a common occurrence, following the tips above can help you avoid a negative balance. Paying attention to this can help prevent your discretionary cash flow from getting tied up with your card issuer unnecessarily — a key to smart credit card habits.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

What happens if I overpay my credit card?

If you overpay your credit card, the amount is reflected as a negative balance on your account balance. You can request a refund or let the bank apply it to your next statement.

Does a negative balance have an effect on my credit score?

No, a negative balance doesn’t affect your credit score. Your bank reports it as a zero balance.

How long do you have to dispute a credit card charge?

You have 60 days to dispute a credit card charge, starting from the date it appears on your statement. The bank is legally required to acknowledge your dispute within 30 days of receiving it. A resolution must be enacted within two billing cycles or a maximum of 90 days from your dispute date.

How can I request a refund after overpaying my credit card?

Send a notification to your bank requesting a refund and specifying the method in which you’d like to receive it, such as a check or other method. Check with your bank about how to submit it. The bank is required to provide your refund within seven business days of your request.

Photo credit: iStock/Really Design

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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A wrap-around mortgage is a form of seller financing that benefits the seller financially and helps buyers who can’t qualify for a traditional mortgage.

There are risks associated with this kind of creative financing, and alternatives to consider.

What Is a Wrap-Around Mortgage?

Traditionally, a buyer weighs the different mortgage types and obtains a mortgage loan to pay the seller for the home. The seller’s existing mortgage gets paid off, with any extra money going to the seller.

With a wrap-around mortgage, a form of owner financing, the original mortgage is kept intact, and the funds a buyer needs to purchase the home are “wrapped around” the current balance.

How Does a Wrap-Around Mortgage Work?

First, the seller must have an assumable mortgage and lender permission to wrap the mortgage. The seller and buyer agree on a price and down payment.

The buyer signs a promissory note, vowing to make agreed-upon payments to the seller. The seller might transfer the home title to the buyer at that time or when the loan is repaid.

The seller continues to make regular mortgage payments to their lender, keeping any monetary overage.

To make this feasible and worthwhile to the seller, the buyer typically pays a higher interest rate than what’s being charged on the original loan (on which the seller is still making payments).

Let’s say you want to sell your home for $200,000, and you still owe $75,000 on your mortgage at 5%. You find a buyer who is willing to pay your price but who can’t get a conventional mortgage approved.

Your buyer can give you $20,000 for a down payment. The two of you will then sign a promissory note for $180,000, at, say, 7%. You’ll make a profit on the spread between the two interest rates and the difference between the sale price and original mortgage balance.

If you’re crunching numbers, a mortgage payment calculator can help.

What Are the Advantages of a Wrap-Around Mortgage?

Here are ways that a wrap-around mortgage can benefit the buyer as well as the seller.

Benefits for the buyer:

•   A carry-back loan allows you to buy a house that you might not otherwise qualify for, perhaps because of low credit scores.

•   As long as a seller is willing to sell to you under this arrangement, your financing is essentially approved without your needing to do anything else.

•   You’ll pay no closing costs on the loan.

•   If you are self-employed, you likely won’t need to provide statements from past income as you would with a traditional mortgage lender. The seller may only be interested in your ability to pay now.

Benefits for the seller:

•   You don’t need to wait for a buyer to be approved for financing.

•   You can charge a higher interest rate than what you’re paying, allowing you the opportunity to create steady cash flow and make a profit.

•   In a buyer’s market, where the supply of homes for sale is greater than demand, your willingness to offer a wrap-around mortgage can make you stand out.

Are There Risks With Wrap-Around Mortgages?

Yes. Wrap-around mortgages come with risks for both buyers and sellers.

Risks for the buyer:

•   You’ll likely want to pay an attorney to review the agreement. If you don’t, then you’re assuming more of the risks as described in the next two bullet points.

•   You are putting your trust in the seller. If they don’t keep up the mortgage payments on the original loan, the home could go into foreclosure. (You could ask to make payments directly to the lender, which the seller may or may not agree to.)

•   If the seller has not told their lender about the arrangement, this could lead to problems. If the original mortgage has a due-on-sale clause, the financial institution could demand payment in full from the seller.

Risks for the seller:

•   The buyer may not make payments on time — or could stop making them altogether. If this happens, you still owe mortgage payments to your lender.

•   Any lag in making your payments can have a significant negative impact on your credit scores, making it more challenging to get good interest rates on loans.

•   Suing the buyer for past-due funds can get expensive, and if the buyer doesn’t have the money to pay you, this may not provide you with any real mortgage relief.

If you’re shopping for a mortgage, it can make sense to explore alternatives. A home loan help center is a good place to start.

Alternatives to Wrap-Around Mortgages

Alternatives can include the following:

•   FHA loans

•   VA loans

•   USDA loans

Here’s an overview of each.

FHA Loans

With loans insured by the Federal Housing Administration, FHA-approved lenders can offer low down payments while easing up on credit scores required to qualify.

VA Loans

The U.S. Department of Veterans Affairs offers low-interest-rate VA loans directly to qualifying borrowers (based on service history and duty status) and backs loans made by participating lenders.

USDA Loans

The U.S. Department of Agriculture guarantees USDA loans for qualifying rural Americans who have low to moderate levels of income. The USDA also offers funding to improve homes to safe and sanitary standards.

The Takeaway

A wrap-around mortgage could sound enticing, but buyer beware. Taking time to repair damaged credit or looking into other types of loans might make more sense. If you do enter into this transaction, you’ll probably want to involve a lawyer to make sure your interests are protected.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

Is a wrap-around mortgage a good idea?

This type of mortgage has benefits and risks for both the buyer and the seller.

What is an example of a wrap-around mortgage?

Let’s say a buyer can’t get traditional financing but agrees to purchase a $250,000 house from the seller, with some down payment. The seller still owes $50,000. The buyer agrees to make payments to the seller on the purchase price, and the seller uses a portion of that money to make the usual mortgage payments. The seller profits from charging a higher interest rate than that of the original mortgage.

Who is responsible for a wrap-around loan?

The buyer will be responsible for making payments to the seller according to the agreement signed by the two parties. The seller will be responsible for continuing to make payments on the original mortgage until it is paid off. So both parties have responsibilities to fulfill.

Can wrap-around loans help a buyer purchase a home?

Yes. The key benefit for buyers is that seller financing helps them purchase a home that they otherwise may not have been able to own.

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SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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This article is not intended to be legal advice. Please consult an attorney for advice.

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
^†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.

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