Should I Buy a Car before Buying a House?

Entering adulthood marks several significant milestones, and purchasing major items like a car or a house ranks high on the list. Perhaps you’re contemplating acquiring both simultaneously—an ambitious endeavor. Here are some factors to ponder in this dual endeavor.

If you’re like most people, you’ll probably need financing for both your car and your home. When lenders review your loan application, they assess various factors to determine your ability to repay them. Here are a few key considerations they typically evaluate:

  • Credit Score and History: Your credit score provides a quick snapshot of your creditworthiness based on your borrowing and repayment history. Higher scores indicate lower risk for lenders and improve your chances of securing competitive loan rates.
  • Income and Employment: Lenders also consider your income and employment history. A stable income and steady employment track record enhance your appeal to lenders and may lead to more favorable loan terms.
  • Debt-to-Income Ratio (DTI): This ratio represents the percentage of your monthly gross income that goes toward paying off your existing debts. Lenders assess your DTI to gauge your ability to manage additional debt responsibly.

These factors collectively help lenders assess your financial stability and determine whether to approve your loan applications for both a car and a home.

As per the Consumer Financial Protection Bureau, borrowers with elevated debt-to-income ratios have a greater propensity to miss payments. To evaluate mortgage eligibility, many lenders adhere to a maximum debt-to-income threshold of 43 percent. Exceeding this limit is typically unsustainable for the majority of individuals. Consequently, some lenders may decline mortgage applications that surpass the 43 percent threshold.

Now that you’ve grasped some fundamental aspects, let’s revisit our initial question regarding purchasing a car before buying a home. Here’s how taking out a car loan could impact your upcoming mortgage application:

Car loans impact your credit report, which plays a crucial role in determining your eligibility for other loans, including mortgages. The influence of a car loan on your mortgage prospects can swing in different directions. A consistently good payment history on your car loan can enhance your credit score, thereby increasing your likelihood of qualifying for a mortgage.

Conversely, a history of missed or late payments on your car loan can lower your credit score. Rebuilding a damaged credit history or establishing a new one requires time, so the immediate benefits of timely payments may not immediately translate into improved eligibility for new credit. Moreover, obtaining a recent car loan typically results in one or more recent hard inquiries on your credit report, which can temporarily lower your credit score. While this impact is usually minor and short-lived, depending on the timing, it could potentially influence your mortgage approval process.

Taking out a car loan involves monthly payments, which can potentially increase your debt-to-income ratio. Depending on your financial situation, this may not necessarily prevent you from getting a mortgage. However, it’s important to be mindful that increasing your debt-to-income ratio before your mortgage application could lead to complications.

Buying a car before purchasing a house can potentially impact your mortgage approval negatively. However, this approach can still be feasible if:

  • You’re paying for the car in cash. However, keep in mind that using cash might reduce your available funds for a down payment on a future home.
  • Your debt-to-income ratio remains low enough to meet mortgage lender requirements.
  • You’re not planning to apply for a mortgage in the near future and can use the car loan to improve your credit score over time.

Can I get a car loan after buying a house?

Now, let’s explore the scenario of buying a house before buying a car.

Similar to a car loan, taking on a mortgage can impact your credit score, debt-to-income ratio, and available funds. However, mortgages typically involve larger sums and are more complex. Interestingly, many individuals find it easier to secure approval for a car loan than for a mortgage. This is because mortgages necessitate a more in-depth examination of your financial situation than car loans do.

Given that mortgages are long-term commitments, lenders maintain stringent criteria. A credit score that may not meet the minimum requirement for a mortgage could still be sufficient for obtaining an auto loan. Due to this difference in sensitivity to credit fluctuations, many individuals discover they have multiple auto loan options even after securing a mortgage.

Deciding whether to buy a car before purchasing a house, or vice versa, largely depends on your lifestyle and financial objectives. Both car and home loans affect your credit score and debt-to-income ratio, but mortgages are typically more sensitive to these changes. Knowing how these factors interact can assist you in making a decision that aligns with your personal circumstances and financial goals.