Can I Buy a Car Before Buying a House?

It is common for individuals to consider acquiring a new vehicle around the same time they plan to purchase a home. Both a car and a house represent substantial financial commitments. The decisions surrounding one can significantly influence the feasibility and terms of the other, directly impacting your mortgage eligibility. This article guides you through these financial interdependencies.

How Car Debt Affects Mortgage Eligibility

A new car loan directly influences a borrower’s Debt-to-Income (DTI) ratio, a critical metric mortgage lenders use to assess repayment capacity. The DTI ratio is calculated by dividing your total monthly debt payments by your gross monthly income. Lenders typically prefer DTI ratios below a certain threshold, often around 43% to 50% for conventional mortgages, though this can vary based on loan type and other financial factors.

Introducing a new monthly car payment increases your total monthly debt obligations, elevating your DTI ratio. If this ratio exceeds the lender’s acceptable limit, it could jeopardize your mortgage approval or necessitate a smaller loan amount. Lenders scrutinize this to ensure you have sufficient income to manage mortgage payments and other financial responsibilities, mitigating default risk.

Applying for new car financing results in a hard inquiry on your credit report. This can temporarily cause a slight dip in your credit score. While the impact is often minor, multiple hard inquiries in a short period can signal higher risk to mortgage lenders. Taking on new debt also increases your overall debt load, affecting your credit utilization ratio.

Financial Considerations Beyond Debt

Purchasing a car requires significant upfront and ongoing cash outlays beyond the monthly loan payment. A down payment is typically required for a car loan, often 10% to 20% of the vehicle’s price. This immediate expense draws directly from your liquid assets.

Beyond the down payment, you will face additional costs at purchase, such as sales tax, registration, and titling fees. These cumulative costs can quickly deplete savings earmarked for a home down payment or closing costs. Closing costs, typically 2% to 5% of the loan amount, are a substantial expense in the home buying process.

Higher insurance premiums are another financial consideration following a new car purchase, adding to your regular monthly expenses. These ongoing costs, combined with the initial cash drain, can reduce funds available for an emergency fund. Maintaining sufficient cash reserves is crucial for navigating the home purchase process and ensuring financial stability after closing.

Strategic Timing for Car Purchase

Making major financial moves, such as taking on new debt or making large purchases, during the mortgage application process can introduce complications. Mortgage lenders prefer stability in a borrower’s financial profile from the pre-approval stage through to the final closing. Any significant changes to your credit report, DTI, or cash reserves during this period can trigger re-evaluations by the underwriter.

It is advisable to avoid purchasing a car, or any other major financed item, once you begin your home search and especially after applying for a mortgage. Lenders often perform a final credit check just before closing. Discovering a new car loan at this late stage could delay or even jeopardize your home loan approval.

The safest approach is to purchase a car well before starting the home buying process or wait until after your home purchase has successfully closed. Acquiring a car several months before your home search allows time for your credit score to recover and DTI to stabilize. Waiting until after closing ensures your mortgage eligibility is not impacted by new car debt or associated cash expenditures.

Communicating with Your Lender

Proactive communication with your mortgage lender is a fundamental step when considering new debt or large expenditures like a car purchase. Your lender can provide personalized advice based on your financial situation and current mortgage qualification status. They can assess how a car loan might affect your DTI ratio and overall eligibility.

Before proceeding with a car purchase, discuss your intentions with your lender. They can run scenarios to help you understand the potential impact on your mortgage application, advising whether it is feasible or if waiting is more prudent. This open dialogue helps prevent unexpected issues during the mortgage underwriting process.

Your lender needs to be fully aware of any new debt you plan to take on to accurately re-evaluate your eligibility and adjust recommendations. Seeking their expert advice ensures you make informed decisions that align with your homeownership goals, avoiding surprises that could derail your mortgage approval.