Did you know that buying a car before you buy a home could impact your ability to get a mortgage? A car loan affects your credit in several ways, and it also reduces the amount of income you have that’s not tied up in debt obligations. Find out more below about the relationship between buying a car and buying a home. Then, make an educated decision about what’s the better priority for you right now: an auto loan or a mortgage.
Does Buying a Car Affect Your Credit?
Yes, buying a car impacts your credit. Having a clean auto loan payment history can do wonders for your credit score. And a favorable credit rating does help you qualify for a mortgage.
Your payment history is the most important component of your credit score—so late payments can cause your scores to drop in a big way. That can kill your chances of getting a mortgage.
Another way buying a car can impact your score is in changing your credit mix. Creditors like to see that you can handle different types of debt responsibly. If you’ve only ever had revolving credit such as a credit card or store account, adding an installment loan can potentially bump your score up.
Most people check their credit scores before they buy a home. They may find out too late that they have not-so-great credit, leaving themselves little time to improve it. It’s a good idea to make monitoring your credit scores a part of your financial routine so when you’re ready to buy a house, you’re prepared to work within your credit standing.
What Kind of Credit Score Do You Need to Buy a House?
The credit score you need to qualify for a mortgage depends on what type of lending you’re pursuing. Government-backed loans, such as those through FHA, VA or USDA programs, tend to have the most forgiving credit requirements. For example, you can qualify for an FHA loan with a credit score as low as 580. If you can put a decent percent down, you may be able to qualify for some of these mortgage loans with a credit score as low as 500.
However, most commercial lenders are looking for credit scores of 660 and above. Some will approve buyers with a credit score as low as 620 if all other factors are favorable.
How Buying Power Is Impacted When You Buy a Car
Getting approved for a mortgage doesn’t just come down to your credit score, though. Mortgages are big debts—often the largest debt obligation people take on. Lenders want to see that you have the buying power to pay your mortgage consistently.
Your buying power is measured as the difference between your income and your liability payments. The bigger this gap is, the more room you have to accommodate a mortgage payment. This is also referred to as the debt-to-income ratio.
The debt-to-income ratio is the percent of your income that goes toward debt. According to the Consumer Financial Protection Bureau, most mortgage lenders will only approve someone if their debt-to-income ratio falls at 43% or below including their new mortgage payment. That’s because lenders know you need the rest of your money to pay for living expenses and save for the future.
Buying a car before buying a house can alter those numbers enough to keep you from getting approved for a mortgage. Consider the example below.
Let’s say someone makes $3,500 a month. They have the following debts, totaling $450 each month:
- A personal loan with a $200 monthly payment
- A credit card with a $100 monthly payment
- A student loan with a monthly payment of $150
In this situation, 43% of the person’s income is $1,505. They already have $450 in monthly debt obligations, which means most lenders would consider approving them for mortgages with payments of $1,055 or less. If they have good credit and all other factors are favorable, they stand a good chance of being able to buy a home.
Now, consider the difference if that same person bought a car before buying a home. If the car payment is $500 per month, that brings the total monthly debt payments to $950. It also means the person would be unlikely to qualify for a mortgage with a monthly payment more than $555. That substantially lowers their buying power when looking at homes.
At 3.93% interest, $555 a month on a 30-year mortgage means buying a home with a price tag of around $117,000 or less. At the same rate and terms, you could buy a home worth around $223,000 if you had $1,055 to spend monthly.
Should I Buy a Car Before a House?
Whether or not you buy a car before you buy a house depends on a variety of factors. A few times when you mightbuy a car before buying a house are described below.
Your Income and Debt-to-Income Ratio Can Take It
If you have a high income and low debt, adding a car loan may not impact your ability to buy the house you want.
For example, if you have an income of $5,000 a month, 43% of that is $2,150. If you only have $500 in existing debt, you could add a $500 car payment and still potentially get approved for a mortgage in the amount of $1,150.
That being said, you shouldn’t max out your debt-to-income ratio just because you can. And you should also be cognizant of your monthly expenses. If you have a large family, expensive hobbies or medical needs, these could all mean you need more than 57% of your income each month for things that aren’t bills.
You’re Not Buying the Home for a While
If your home purchase plans are in the distant future, you may be able to purchase a vehicle without it impacting your later mortgage as much. This is typically true in two cases.
- You’re not buying a home for three or more years, and you can pay for the car in that time. If you want to buy a home in four years, for example, and you can afford a three-year car loan, this might actually help Make all your payments on time and your payment history could increase your credit score.
- You’re planning to buy a home before your car is paid off, but you also expect your income to increase. If you buy a car that costs $400 a month, that’s $4,800 per year. If you expect your income to go up $10,000 a year before you buy a home, your car won’t be a concern for debt-to-income ratio.
Can I Get a Car Loan After Buying a House?
Outside of those situations, however, buying a car could make it more difficult for you to get a mortgage loan for the home that you really want. However, car loans are typically easier to get, as they don’t involve as deep a dive into your credit and debt-to-income situation. You might consider getting a car after you get your home. In fact, if you have credit good enough to qualify for a mortgage and you don’t do anything to jeopardize that, you may find that you’re able to access numerous car loan options after you buy a house.