Adulthood comes with many milestones, and making big purchases like buying a car or a house are both toward the top of the list. Perhaps you’re even considering buying a house and car at the same time! That’s an ambitious prospect, so here are a few things you may want to consider.
Purchasing your first home is an exciting milestone. But having an existing auto loan can complicate the mortgage process. Your car payment and loan balance affect your debt-to-income ratio and borrowing power.
With some preparation, you can position yourself to buy a house even with a car loan. Follow these tips to get mortgage-ready and make your homeownership dream a reality.
How Auto Loans Impact Mortgage Approval
Before diving into strategies, let’s review how having a car loan can influence mortgage qualification and your home buying budget:
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Credit scores – Auto loan inquiries and missed payments hurt your credit, resulting in higher mortgage rates or denial.
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Debt-to-income ratio – Your total monthly debt payments, including your car loan, typically can’t exceed 43% of income.
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Borrowing power – Existing debts reduce the mortgage amount you qualify for, limiting home options.
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Timing – Applying for new credit before closing may jeopardize approval if your ratios shift
While manageable, these factors mean working around an auto loan requires some savvy planning.
7 Tips for Buying a House With an Existing Car Loan
If you’re hoping to buy a home soon, use these tips to get mortgage-ready despite having a car payment:
1. Make payments on time
Staying current on your auto loan protects your credit scores. This helps you qualify for better mortgage rates.
2. Pay down balances
Consider making extra payments to reduce auto loan balances before applying for a mortgage. This lowers your debt-to-income ratio.
3. Increase your down payment
A larger down payment results in a smaller mortgage amount. This helps offset the impact of your car payment on borrowing power.
4. Lower other debts
Reduce credit card or student loan balances to maximize how much you can borrow for a home.
5. Boost income
Look for ways to increase your income through a promotion, side gig, or new job. Higher earnings help balance car debts.
6. Enlist a co-borrower
Adding a co-borrower combines incomes and improves your chances of approval.
7. Delay new credit
Avoid applying for additional financing at least six months before your mortgage application. This maintains your current credit profile.
With some strategic planning, you can secure a mortgage despite having an existing auto loan. Now let’s explore these tips in more detail.
Protect Your Credit Scores
As soon as you start thinking about buying a home, safeguarding your credit should become a top priority. Mortgage lenders will carefully review your credit reports and scores to assess your repayment risk.
Here are key steps to maintain excellent credit while paying off a car loan:
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Make at least the minimum monthly payment on time each month. Set up autopay through your lender to avoid missed payments.
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Keep credit card balances low. High balances hurt your credit utilization ratio.
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Don’t apply for new credit cards or loans. Too many inquiries in a short period can lower your scores.
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Review reports annually and dispute any errors with the credit bureaus.
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Consider responsible ways to add positive payment history, like becoming an authorized user on a spouse or parent’s older account.
With diligent credit management, your auto loan could actually help strengthen your credit profile for a mortgage application.
Reduce Your Auto Loan Balance
While still maintaining regular payments on your car loan, consider making extra principal payments to pay down the balance faster.
Every extra $100 per month can knock as much as a year off your loan term. This gradually decreases the required monthly payments.
Paying ahead can make an especially big impact right before applying for a mortgage. Even shaving just $50-100 off your monthly car payment could allow you to squeeze under key debt-to-income ratio thresholds.
Set a goal for how much you want to lower your auto balance prior to getting a mortgage. The lower the balance, the less it will impact your borrowing power and monthly debts.
Increase Your Down Payment
Putting down more upfront for the home purchase effectively counteracts the impact of your existing car loan on buying power.
While lenders generally accept down payments as low as 3-5%, bumping yours up to 10-20% significantly reduces the mortgage amount you need to qualify for. This helps offset the borrowing limitations created by your auto loan payment.
A higher down payment also often means better mortgage rates from lenders. You may avoid having to pay private mortgage insurance (PMI) as well.
Begin setting aside extra savings well in advance to accumulate funds for a sizable down payment. This gives your auto loan less influence over your home shopping budget.
Lower Other Monthly Debts
Beyond your car payment, lenders will tally up all your monthly credit card, student loan, personal loan, and other debt obligations when calculating your debt-to-income ratio.
Look for opportunities to reduce your balances on any installment loans or revolving credit accounts. For example:
- Pay twice the minimum on credit cards each month
- Make bi-weekly student loan payments to pay them down faster
- Stick to a strict budget that frees up more cash for extra debt payments
- Refinance student loans or personal loans at lower rates to reduce monthly payments
Chipping away at your other long- and short-term debts incrementally lightens your entire debt load. This expands the home loan amount you can qualify for.
Increase Your Income
Another option is to look for ways to legitimately increase your gross monthly income. A bump in earnings provides more cushion to cover both your auto and mortgage payments comfortably.
Some possibilities include:
- Asking for a raise at your current job
- Picking up a side gig doing rideshare, delivery, or freelance work
- Taking on a part-time second job evenings or weekends
- Starting a small business that generates supplemental income
- Relocating to a higher-paying role or company
Even an extra few hundred dollars per month can make your income appear more stable and sufficient to service your debts. Just make sure any income changes are in place at least a few months before applying for a mortgage.
Enlist a Co-Borrower
If it’s an option, adding a co-borrower to your mortgage application can improve your chances of approval. This could be a spouse, partner, family member, or even close friend.
The co-borrower’s income gets counted toward monthly income calculations. Their positive credit history also helps balance out any dings from your auto loan.
Just keep in mind, co-borrowers share equal responsibility for repaying the mortgage. While it can be an excellent workaround, only pursue this route if you have someone trustworthy who will make payments with you.
Avoid Applying for New Credit
It can be tempting to open new rewards credit cards or take out a small personal loan to cover closing costs as you prepare for a home purchase. But resist the urge!
Each new credit inquiry or installment account you add in the months preceding your mortgage application will show up on your credit report. Too many recent inquiries or new tradelines can make lenders skittish.
Steer clear of applying for any new financing, including:
- Credit cards
- Personal, auto, or student loans
- Department store cards
- Home improvement financing
Stick with the accounts you already have open. Postponing new credit applications until after your home loan closes keeps your credit profile stable.
Think Twice Before Paying Off Your Car Loan Early
While minimizing your car loan balance through extra payments can be helpful, you may want to think carefully before deciding to pay off the entire auto loan early.
Paying off an installment loan eliminates one of your active tradelines with positive payment history. This could result in a dip in your credit scores.
Having fewer open accounts also reduces your overall available credit, potentially increasing your credit utilization ratio.
Sometimes keeping the loan open and continuing regular monthly payments is better for your credit profile than paying it off entirely before getting a mortgage. Evaluate the pros and cons in your specific situation.
Key Takeaways on Home Buying With an Auto Loan
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Keep credit scores high by maintaining on-time payments and low card balances.
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Consider making extra principal payments to reduce auto loan balances prior to applying for a mortgage.
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Save for a larger down payment to offset the impact of your monthly car payment.
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Reduce other debts whenever possible to keep your debt-to-income ratio low.
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Increase your income through raises, bonuses, part-time work, or starting a side business.
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Add a trustworthy co-borrower to combine incomes and credit histories.
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Avoid new financing that could alter your credit profile in the months preceding your application.
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Weigh the pros and cons before deciding to pay off an auto loan entirely.
With prudent planning, you can work around an existing car loan to qualify for a mortgage and embark on your homeownership journey. Aligning your finances and credit profile ahead of time puts you in a strong position to achieve your dreams of buying a home.
Debt-to-income ratio and the 43 percent threshold
According to the Consumer Financial Protection Bureau, borrowers with high debt-to-income ratios are more likely to miss payments. Many lenders use a maximum debt-to-income threshold of 43 percent to assess mortgage eligibility. Going beyond this number isn’t generally sustainable for most people. Some lenders may even deny a mortgage request that puts you over the 43 percent threshold.
Can I get a car loan after buying a house?
Now that we’ve seen what buying a car before buying a house might look like, let’s examine the situation in reverse.
Much like a car loan, a mortgage could impact your credit score, debt-to-income and available funds. In fact, mortgages tend to be much bigger in size and scope. However, many people find that getting approved for a car loan is a little easier than the approval process for a mortgage. This is because mortgages tend to require a much deeper investigation into your finances than car loans do.
Because mortgages are a long-term obligation, lenders are understandably strict about requirements. A credit score that’s deemed below the qualification requirement for a mortgage may still be acceptable to auto lenders, for instance. Since auto loans are comparatively less sensitive to fluctuations in credit than mortgages, many people find they still have a number of auto loan options available to them after getting a mortgage.
If you’re looking to buy a car before buying a house, or vice versa, it often comes down to your own lifestyle and financial goals. Both car and home loans impact your credit score and debt-to-income ratio — but mortgages are comparatively more sensitive to these fluctuations. Understanding how these factors play into each other can help you make the choice that’s right for you.
Does a Car Payment Affect Getting a Mortgage?
FAQ
Does a car loan affect buying a house?
Can I combine my car loan with my mortgage?
Can I borrow money against my house for a car?
Is it easier to get a home loan than a car loan?
Can you get a mortgage if you buy a car?
Because financing a car can cause your credit scores to drop, increase your debt-to-income (DTI), and eat away at your down payment for a house, all of which make it harder to qualify for an affordable mortgage. That doesn’t mean you can’t get a mortgage after you buy a car, but it can make homebuying more costly.
Should you take on a car loan before getting a mortgage?
If you take on a car loan six to 12 months before applying for a mortgage and make timely payments, your credit score will increase. Also, “Mortgage lenders typically like to see at least three active trade lines,” Grabel said. If your credit is limited, having a well-managed auto loan works in your favor.
Should I pay off my car before buying a house?
There are many factors that lenders consider, but your credit score and debt-to-income ratio are among the most important. Paying off a car loan can help you improve your readiness for a mortgage, but it may not necessarily be the right decision. Here’s what to consider before you proceed.
Can paying off a car help you get a mortgage?
Paying off your car may improve your debt-to-income ratio and help you qualify for a mortgage. Lenders consider your debt-to-income ratio, or DTI, a key factor when determining your eligibility for a mortgage. Paying off a car loan can potentially lower your DTI and improve your chances of getting approved.