Can You Buy a House After Buying a Car?
Navigate the complexities of buying a house after a car purchase. Understand the financial implications and learn how to strategically plan both major investments.
When individuals consider purchasing both a car and a house, a common concern arises regarding how one purchase might influence the other. Understanding the financial implications of acquiring a car loan before seeking a mortgage is helpful for those navigating these significant life decisions.
How a Car Purchase Affects Your Credit Profile
Obtaining a car loan directly influences an individual’s credit profile. When applying for a car loan, lenders perform a “hard inquiry” on a credit report, which can cause a temporary, minor dip in a credit score. This inquiry remains on the credit report for up to two years.
The addition of a new credit account, such as a car loan, also affects the average age of all credit accounts, which can slightly reduce a credit score, especially for individuals with limited credit history. A new car loan immediately increases the total amount of debt an individual carries. While consistent, on-time payments on the car loan can positively contribute to a credit score over time, the initial impact of increased debt and a new account is what mortgage lenders consider.
Understanding Your Debt-to-Income Ratio
The debt-to-income (DTI) ratio is a financial metric that mortgage lenders rely on to assess a borrower’s ability to manage monthly payments and repay debts. It is calculated by dividing total monthly debt payments by gross monthly income. For example, if total monthly debt payments (including credit card minimums, student loans, and a new car payment) amount to $1,500 and gross monthly income is $4,000, the DTI ratio would be 37.5% ($1,500 / $4,000).
A new car payment directly increases the “debt” portion of this ratio, which can elevate an individual’s overall DTI. Lenders use this ratio to determine if a borrower has sufficient income remaining after covering existing obligations to afford a new mortgage payment.
A higher DTI indicates a greater proportion of income is already allocated to debt, potentially signaling a higher risk to lenders. Most lenders prefer a DTI ratio of 43% or lower.
Mortgage Lender Assessment
When evaluating a mortgage application, lenders conduct a comprehensive review of a borrower’s financial health, paying close attention to recent credit activity and new financial obligations. A new car loan is viewed as a significant recurring expense that directly impacts a borrower’s capacity to take on additional debt.
Lenders analyze the borrower’s DTI ratio as a primary indicator of repayment capacity. If the car loan pushes the DTI above acceptable thresholds, it can hinder mortgage approval or limit the loan amount for which a borrower qualifies.
While a strong credit score is important, lenders also prioritize a stable financial picture, which includes manageable debt levels relative to income. They seek evidence of financial stability, which can be disrupted by taking on new, substantial monthly payments.
Strategic Planning for Both Purchases
For individuals planning to purchase both a car and a house, strategic timing can significantly influence mortgage eligibility. Generally, purchasing the house first, if financially feasible, is often recommended, as a mortgage payment is typically a larger and more impactful monthly obligation than a car payment.
If a car purchase is necessary before a home, allowing a few months to pass after acquiring the car loan before applying for a mortgage can be beneficial. This allows the initial credit score dip to recover and establishes a payment history for the car loan.
Before making either purchase, it is advisable to check one’s credit score and calculate the DTI ratio. This proactive step provides a clear understanding of one’s financial standing and potential impact on future lending decisions.
To mitigate the effect of a car loan on DTI, consider making a larger down payment on the car to reduce the monthly loan amount, or choose a more affordable vehicle. Similarly, saving a larger down payment for the house can reduce the mortgage amount needed, which in turn lowers the prospective monthly mortgage payment and improves the overall DTI.
Maintaining stable employment and avoiding other new debt, such as opening new credit card accounts or increasing existing credit card balances, is also prudent during the period leading up to and during the mortgage application process. These steps help present a stronger financial position to mortgage lenders.