Adulthood comes with many milestones, and making 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’ll probably need financing for your car and your home. When prospective lenders look at your loan application, they need to feel confident you’ll be able to pay them back. Here are a few ways they might make this evaluation:
- Credit score and history: Your credit score is a number that quickly summarizes your credit report, which reflects your borrowing and payment habits. Higher scores indicate less risk for the lender and therefore, better chances of approval for competitive loan rates.
- Income and employment: Your income and employment history may affect your loan terms. A steady income and employment history likely increases your favorability with lenders.
- Debt-to-income ratio: Simply put, this is the percentage of your monthly gross income that goes toward repaying your current debt obligations.
Debt-to-income ratio and the 43 percent 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 debt-to-income threshold of 43 percent to assess mortgage eligibility. Going beyond this number isn’t generally sustainable for most people. Some lenders may even deny a mortgage request that puts you over the 43 percent 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, as we know, 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 can boost your credit score and, by extension, raise your chances of qualifying for a mortgage.
On the flip side, a payment history that shows delinquent payments can 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 also implies one or more recent hard inquiries into your credit, which can 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 debt-to-income ratio
A car loan means monthly payments, which is likely to raise your debt-to-income ratio. Depending on your financial standing, this may not be a dealbreaker. Just be aware that raising your debt-to-income ratio 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:
- You’re paying for the car in cash. Be aware, though. Paying in cash could simultaneously lessen available funds for a down payment on a future home.
- Your debt-to-income ratio is low enough.
- You aren’t getting a mortgage for some time and can use the car loan to build up your credit.
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 could impact your credit score, debt-to-income 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 understandably 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. Since 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.
If you’re looking to buy a car before buying a house, or vice versa, it often comes down to your own lifestyle and financial goals. Both car and home loans impact your credit score and debt-to-income ratio — but mortgages are comparatively more sensitive to these fluctuations. Understanding how these factors play into each other can help you make the choice that’s right for you.