Does Buying a Car Affect Refinancing a House?

Buying a car can significantly impact a home refinance application. Understanding these financial implications before taking on new debt is crucial. This article explains the financial considerations when a vehicle purchase precedes or coincides with a house refinance.

Understanding Key Financial Metrics

Lenders closely scrutinize two primary financial metrics during a house refinance application: your credit score and your debt-to-income (DTI) ratio. A credit score numerically represents your creditworthiness, indicating your ability to manage and repay debts. It is influenced by factors such as payment history (35%), amounts owed (30%), and the length of your credit history (15%). New credit and types of credit used each account for 10%.

The debt-to-income (DTI) ratio measures the percentage of your gross monthly income dedicated to monthly debt obligations. Lenders use this ratio to assess your capacity for additional debt, such as a new mortgage payment. To calculate DTI, sum all recurring monthly debt payments, including credit cards, student loans, and existing auto loans, then divide by your gross monthly income. A lower DTI ratio indicates a healthier balance between income and obligations, which lenders view favorably.

Impact on Your Refinance Application

A car purchase directly affects both your credit score and your debt-to-income ratio, influencing your house refinance application. When applying for a car loan, lenders perform a “hard inquiry” on your credit report. This inquiry can cause a temporary, minor dip in your credit score, usually by less than five points. While hard inquiries remain on your report for up to two years, their impact typically diminishes within 12 months.

A new car loan also introduces a new credit account, which can affect the average age of your credit accounts and add a new line of credit to your profile. This can influence your credit score, depending on your overall credit history and existing accounts. The impact varies, with those having fewer accounts or a shorter credit history potentially seeing a more noticeable effect.

The new monthly car payment directly increases your total monthly debt obligations, raising your debt-to-income ratio. For example, a new car payment could push your DTI higher, potentially from 30% to 35% or more. Lenders often prefer a DTI ratio of 36% or lower for mortgage approvals, though some conventional loans may allow up to 50%, and government-backed loans may permit higher DTIs. A higher DTI makes it more challenging to qualify for a home refinance or secure favorable interest rates, as it suggests a greater proportion of income is already committed to debt. Lenders may view such recent debt with more caution.

Strategic Timing of Vehicle Purchase

The timing of a vehicle purchase relative to a home refinance application holds considerable importance. It is advisable to avoid buying a car just before or during the home refinance process. Any new credit inquiries or significant debt incurred during this period will be immediately visible to mortgage lenders. Such actions could jeopardize the refinance approval or the terms offered, as they alter the financial profile that the lender initially assessed.

The optimal strategy involves waiting until after your home refinance process is fully completed and closed before taking on new debt like a car loan. This ensures that your financial metrics, particularly your credit score and DTI, are in the best possible standing when the mortgage lender evaluates your application.

If a car purchase is unavoidable before a refinance, complete the transaction significantly in advance, ideally six months or more prior to applying. This allows time for the initial credit score dip from the hard inquiry to recover. It also allows for a positive payment history to be established on the new car loan, demonstrating responsible debt management.