Most Americans need a car to travel to and from work, run errands and take their kids to after-school activities. People also need a place to live. If you want to purchase a house in the near future, splurging on a brand-new vehicle could make it difficult or impossible to qualify for a large enough mortgage to buy the home you want.
How a New Car Loan Could Affect Your Ability to Get a Mortgage
When you apply for a mortgage, a lender will consider your debt-to-income (DTI) ratio, which is the total cost of car, student and other loans, as well as credit card bills and other debts. Most lenders don’t want a borrower to have a DTI ratio above 35 percent of gross income. If you buy a new car with a high monthly payment and have other debt, your DTI ratio might be too high to qualify for a mortgage, or a lender might approve you for an amount that’s too low to buy a house in your area, unless you come up with a huge down payment.
To qualify for a mortgage at a low interest rate, you’ll need your credit to be in the best shape it can be. A new car loan would lower your credit score temporarily because of a hard inquiry when the lender checked your credit report, as well as the increased debt load. Making auto loan payments on time each month could raise your score, but that could be a long process.
Consider a Used Car
If your car is on its last legs and you need to replace it, consider purchasing a used vehicle. Since cars depreciate quickly, a car that’s one or two years old would cost significantly less than a new one, but it would likely have low miles, be in excellent condition and still be covered by a warranty. You could get a reliable vehicle with a much lower payment than you would with a new one, and you would pay less for car insurance. Your debt-to-income ratio would be lower than it would be if you bought a new car, and you’d be able to qualify for a bigger mortgage and buy the house you wanted.
Prioritize Large Purchases
If you want to replace your car and buy a home, you’d be better off focusing on a house first. Since a home is probably the largest purchase you’ll ever make, you want to be sure that your credit score is as high as possible and that a lender will be confident in your ability to pay a mortgage. If you can’t put off replacing your vehicle, buy one used to keep your debt obligations down so you can qualify for a mortgage to purchase your dream home.
This article is intended for informational purposes only and should not be construed as professional or legal advice.