Buying a car before buying a house: What to know

Quick insights

Adulthood comes with many milestones, and big purchases like buying a car or a house are both toward the top of the list. Perhaps you’re even considering buying a house and car at the same time! That’s an ambitious prospect, so here are a few things you may want to consider.

How lenders evaluate loan eligibility

If you’re like most people, you may need financing for your car and your home. When prospective lenders look at your loan application, they need to aim to assess whether you can repay the loan. Here are a few ways they might make this evaluation:

DTI and the 43% threshold

According to the Consumer Financial Protection Bureau, borrowers with high debt-to-income ratios are more likely to miss payments. Many lenders use a maximum DTI threshold of 43% to assess mortgage eligibility. Going beyond this number may not be sustainable for most people. Some lenders may even deny a mortgage request that pushes the DTI over the 43% threshold. 

Buying a car before buying a house

Now that you understand some of those basics, let’s go back to our original question about buying a car before buying a home. Here’s how a car loan might affect your pending mortgage:

Impact on credit score

Car loans are reflected in your credit report, which is a factor in your loan eligibility. But the impact a car loan has on your mortgage can go either way. A clean, established payment history on your car loan may boost your credit score and, by extension, increase your chances of qualifying for a mortgage. 

On the flip side, a payment history that shows delinquent payments may lower your credit score. Repairing a damaged credit history or building a new one takes time, so making payments on time may not have immediate benefits in making you eligible for new credit. A recent car loan may involve one or more recent hard inquiries into your credit, which may lower your credit score. This may be relatively minor and temporary, but depending on the timing, it may be enough to affect your mortgage approval. 

Impact on DTI

A car loan means monthly payments, which may raise your DTI. Depending on your financial standing, this may not be a dealbreaker. Just be aware that raising your DTI before your mortgage is approved may result in complications. 

When it makes sense

As you can see, buying a car before you buy a house can sometimes be a detriment to your mortgage approval. However, going this route can still be a viable option, particularly if:

Can I get a car loan after buying a house?

Now that we’ve seen what buying a car before buying a house might look like, let’s examine the situation in reverse.

Much like a car loan, a mortgage may affect your credit score, DTI and available funds. In fact, mortgages tend to be much bigger in size and scope. However, many people find that getting approved for a car loan is a little easier than the approval process for a mortgage. This is because mortgages tend to require a much deeper investigation into your finances than car loans do. 

Because mortgages are a long-term obligation, lenders are strict about requirements. A credit score that’s deemed below the qualification requirement for a mortgage may still be acceptable to auto lenders, for instance. Because auto loans are comparatively less sensitive to fluctuations in credit than mortgages, many people find they still have a number of auto loan options available to them after getting a mortgage. 

In summary

If you’re looking to buy a car before buying a house, or vice versa, the decision generally comes down to your own lifestyle and financial goals. Both car and home loans impact your credit score and DTI, but mortgages may be more sensitive to these fluctuations. Understanding how these factors play into each other can help you make the choice that’s right for you.