Can You Buy a Car While Buying a House?

Purchasing a home and a car are significant financial commitments. Navigating these two processes simultaneously requires careful planning and understanding how one can affect the other. It involves assessing personal financial capacity and anticipating scrutiny from lenders.

Understanding Mortgage Lender Scrutiny

Mortgage lenders evaluate a borrower’s financial health to determine their ability to manage a new home loan. A primary metric is the Debt-to-Income (DTI) ratio, which compares monthly debt payments to gross monthly income. Lenders prefer a DTI ratio of 36% or less, though some programs, like FHA or VA loans, allow ratios up to 43% or even 50%. A new car loan significantly adds to monthly debt, directly increasing this ratio. For instance, a monthly car payment of $300 can reduce the amount a borrower qualifies for on a mortgage by approximately $61,000, assuming a 3.25% rate over 30 years.

Beyond the DTI ratio, a new car purchase also impacts a borrower’s credit score, another factor for mortgage approval. Applying for new credit, such as an auto loan, results in a “hard inquiry” on the credit report. A single hard inquiry causes a small, temporary dip in a credit score, usually less than five points. However, multiple hard inquiries in a short period can have a compounding negative effect. Mortgage-related inquiries within a 14 to 45-day window are often treated as a single event.

Opening a new credit account, like a car loan, affects the average age of a borrower’s credit accounts. A newer account can lower this average, which can reduce the credit score, particularly for those with a shorter credit history. While the impact can be temporary, lenders view frequent new credit activity as a sign of financial stress or overspending. This increased risk perception can influence loan terms or approval, making a stable credit profile important during home buying.

The Role of Timing

The timing of a car purchase relative to the home-buying process can influence mortgage approval. The home-buying journey involves several stages: pre-approval, the search and offer phase, underwriting, and closing. Each stage presents different implications for new debt.

During pre-approval, a lender assesses financial information to estimate how much home a borrower can afford. Any new debt acquired after this point, such as a car loan, can alter the financial picture that led to the initial pre-approval. This change can reduce the mortgage loan amount a borrower qualifies for.

The underwriting process, which takes between a few days to several weeks, is sensitive to financial changes. During this phase, mortgage underwriters verify a borrower’s income, credit history, and assets. They look for financial stability. Taking on a new car loan at this juncture introduces a significant change to debt and credit.

Lenders perform a final credit check just before closing to ensure no material changes have occurred since the initial application or pre-approval. If a new car loan appears on the credit report at this late stage, it can jeopardize the entire mortgage approval. This is because the increased debt burden can push the DTI ratio above acceptable limits or signal an elevated risk to the lender, delaying or even canceling the closing.

Financial Considerations

Beyond the direct impact on lender criteria, purchasing a car while buying a home carries broader financial implications. A car purchase requires a down payment, which can deplete cash reserves designated for the home. These reserves cover a mortgage down payment, which can range from 3% to 20% or more of the home’s purchase price, and closing costs, between 2% and 5% of the loan amount.

Dedicating savings to a car down payment means less cash available for housing expenses. This can force a borrower to opt for a smaller down payment on the home, leading to a larger loan amount or requiring private mortgage insurance (PMI). The monthly car payment reduces available cash flow, which can affect a homeowner’s ability to afford ongoing housing costs such as property taxes, insurance, maintenance, and unexpected repairs.

Maintaining an emergency fund is important, especially for new homeowners who face unforeseen repair costs. Financial experts recommend an emergency fund equivalent to three to six months of living expenses. For homeowners, this can also translate to saving 1% to 3% of the home’s value annually for maintenance and repairs. Diverting funds to a car purchase can compromise these savings, leaving a homeowner to financial strain if an unexpected expense arises.