How Does Buying a Car Affect Your Ability to Purchase a House?

Owning a car is often a significant milestone and a priority for many individuals. And so is buying a house. But buying a car and a house back to back could prove to be a challenging feat. Simply put, you might realize that it's often a car vs. house scenario where you would have to decide which one to prioritize. 

How does buying a car affect buying a house?

Most people buy a car via auto loans. Your monthly car payments could potentially impact your eligibility to secure a mortgage for your dream home.

Here’s why.

Mortgage lenders have strict rules when deciding whether to approve your mortgage application. They look at your income and how much debt you already have. If you have a lot of financial obligations, it might make it hard for you to pay your mortgage. And lenders want to make sure you can afford your mortgage payments and won't have trouble paying them on time.

Therefore, it's important to think about your financial situation and whether it's a good time to buy a car, especially if you plan to buy a house soon.

Factors that lenders consider to determine if you qualify for a loan:

Debt-to-Income (DTI) Ratio: Your DTI ratio is a crucial factor that lenders consider when assessing your eligibility for a mortgage or any other type of loan. It represents the percentage of your gross monthly income that is allocated towards paying your monthly debt obligations such as housing costs, personal loans, credit card payments, etc. Lenders generally prefer borrowers with a DTI ratio of no more than 36%. If this ratio exceeds the lender's acceptable limit, it may negatively impact your mortgage approval.

Monthly Expenses: Lenders want assurance that you can afford your mortgage payments comfortably. When evaluating your application, they consider your monthly obligations, including the car loan. If the car loan pushes your overall monthly debt payments beyond what is considered affordable, it may affect your mortgage approval.

How does a car loan prevent you from qualifying for a mortgage?

• Lowers credit score: Buying a car usually involves applying for a loan, which results in a hard inquiry on your credit report. This inquiry, along with the new car loan account, can temporarily lower your credit score. A lower credit score might impact your mortgage interest rate or even make you ineligible for certain loan programs.

• Reduces cash reserve: Purchasing a car often requires a down payment or a significant cash outlay. This can reduce the funds available for your mortgage down payment or impact your cash reserves, which lenders may consider when assessing your ability to handle unexpected expenses or mortgage payments.

Read: How to improve your credit score

What should you buy first - A car or a house?

Consider this alternative: Since most cars depreciate rapidly in value, buying a slightly used vehicle can help you save money. Opting for a one- or two-year-old used car can be a wise choice. Not only does this decision improve your debt-to-income ratio, but it also enables you to qualify for a larger mortgage. Plus, you can still enjoy the ownership of a car. So, depending on your financial situation, make an informed decision on whether you want to invest in a house first or a car.

Buying a car is an exciting milestone, but it's important to be aware of its potential impact on your mortgage approval. By planning ahead, you can balance your financial goals and increase your chances of securing a mortgage that aligns with your homeownership aspirations. Remember to consult with a mortgage professional for personalized guidance tailored to your specific circumstances.