The NFCC often receives questions from readers about their money challenges. We answer your common questions in our Ask an Expert series, in hopes of helping readers find the information they need.
My wife and I are looking to get our first home this year. Unfortunately, my car started acting up and now I need to look at getting a car. If I get a loan for a car, will it affect my ability to buy a house?
Buying a car is one of the most important purchases you’ll make in your life, though buying a home is even more important. Your ability to get both (whether in the same year or not) will depend on a few details, including your income, credit rating and debt.
Because buying a home is a much bigger financial commitment, you’ll want to make that your priority. That means, if possible, putting off a car purchase until after you’ve closed on your home. Why? 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.
Taking on a car loan and a home loan are two of the biggest financial decisions many people make, It’s common for someone to have an auto loan when they start the process of buying their first home So how much does having a car payment affect your ability to qualify for and afford a mortgage? Here’s what potential home buyers need to know
How Car Loans Can Impact Mortgage Eligibility
Car loans can influence mortgage eligibility in a few key ways:
Credit Score
Your credit score plays a major role in qualifying for a home loan, Most lenders require a minimum score between 620-640 to approve a mortgage application
When you take out a car loan, the hard inquiry and new account will cause a small, temporary drop in your score. As long as you have pretty good credit to start with, a 5-10 point dip probably won’t make or break your chances.
The bigger impact comes from how you manage the auto loan. If you make all your monthly payments on time, your score will steadily improve over the loan term. Late or missed payments can tank your credit quickly. Good payment history on an installment loan like a car loan demonstrates you can responsibly manage credit, a key quality lenders want to see.
Debt-to-Income Ratio
Lenders calculate your debt-to-income (DTI) ratio by adding up your monthly debts like car payments, credit cards, student loans, etc. and dividing that number by your gross monthly income.
Most lenders cap DTI for mortgage approval around 43-50%. If your existing debts already have you close to that threshold, adding a car payment could push your DTI over the allowable limit.
Available Funds
When calculating how much mortgage you can afford, lenders look at your income, debts, and assets. The more money you have tied up in an existing car loan each month, the less you’ll have available to put toward a new mortgage payment and other housing expenses.
A high car payment reduces your borrowing power for a home loan. You may only qualify for a smaller mortgage, need to look at cheaper homes, or have to come up with a larger down payment than originally planned.
Timing Your Auto & Mortgage Loans
Because of the potential credit score and debt impacts, timing is an important consideration when balancing both an auto and home loan. Here are a few tips on managing the timeline:
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Avoid new loans right before applying for a mortgage. If you know you’ll be house shopping in the next 3-6 months, try not to take on additional installment loans like a car payment. Even if your credit can absorb the temporary hit, increased monthly debts will affect DTI.
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Allow 6-12 months between loans. Before car shopping, make sure you’re at least 6 months out from buying a home. And after purchasing a vehicle, wait at least a year before applying for a mortgage. This gives your credit score time to benefit from the positive payment history.
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Get pre-approved first. Being pre-approved for a mortgage before shopping for a car gives you a better sense of what payment you can afford without jeopardizing home loan eligibility.
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Watch credit until closing. Lenders will recheck your credit right up to the closing date. Any negative changes could cause issues with final approval. Avoid new accounts and minimize credit inquiries.
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Pay down debts. Reducing other monthly debts like credit cards and student loans before applying for both car and home loans will help keep DTI lower.
Using an Auto Loan to Build Credit for a Mortgage
For potential home buyers with limited credit history, a car loan can actually help build your score and improve mortgage eligibility if used strategically.
Here are some ways responsible auto loan management can set you up for homeownership:
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Establish a payment history. Making 6-12 months of consistent on-time car payments demonstrates you can handle installment credit and manage monthly debts.
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Mix up your credit types. Mortgage lenders like to see experience with different credit accounts – revolving (credit cards) and installment (car loans) being key types.
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Increase score. Responsible auto loan use directly contributes to raising your credit score over time.
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Show stability. Steady employment, income, and finances are required for a home loan. Handling a car payment helps indicate stability.
Alternatives if a Car Loan Impacts Mortgage Chances
If you have car loan debt and it’s putting your mortgage eligibility in jeopardy, you may need to consider alternatives like:
- Paying down the auto loan faster to remove it as an obstacle
- Finding a co-signer for better mortgage approval odds
- Looking for alternative home loan programs with more flexible requirements
- Postponing the home purchase until you pay off the car loan
- Prioritizing saving for a larger down payment to offset debt
- Trading in the car for one with lower payments
Though automotive debt can influence getting a home loan, proper planning around timing, credit management, and finances can help you handle both successfully. Monitor your situation closely and be prepared to adjust your approach if the car loan does end up impacting mortgage eligibility.
Frequently Asked Questions
How long does a car loan affect mortgage approval?
A car loan can impact your mortgage eligibility as long as you have the monthly payment. Most auto loans last 3-6 years. Structuring the car payoff timeline to avoid overlapping too much with your home buying plans can reduce the impact.
Does a paid-off car loan still affect mortgage approval?
Once you’ve paid off the car loan, it no longer counts against your debt-to-income ratio for a mortgage application. However, the account will still show on your credit reports for 7-10 years and can influence your score positively or negatively based on the payment history.
Can you get a mortgage if you have a car lease?
Yes, lenders can count a car lease payment in your DTI calculation just like a loan payment. The lease obligation has a set monthly cost that factors into your expenses and available funds. Make sure your DTI stays within requirements.
Does my car down payment affect my mortgage?
The down payment itself won’t necessarily affect mortgage approval, but could impact your available funds for a home down payment and closing costs. Lenders mainly look at your monthly debts, income and credit health.
Can I trade in my car after buying a house?
Yes, you can trade in or sell your current vehicle at any time, even after closing on a home. Just make sure you get the equity you may need from the trade-in to put toward your new mortgage and other housing expenses.
The Bottom Line
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Car loans appear on your credit reports and add to monthly debts considered for a mortgage application.
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Good auto loan payment history helps improve your credit score over time. Missed payments hurt your score.
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Keeping auto debt low and timing it strategically around a home purchase can minimize impact on mortgage eligibility.
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For some, responsibly managing an auto loan can build credit health and experience needed to qualify for a home loan in the future.
While juggling an auto loan with mortgage financing takes careful planning, it is certainly possible to manage both successfully with the right preparation and approach.
How a car loan affects your credit
Taking on a new loan can affect your credit in a few ways. The initial impact will likely be negative, but it can be positive in the long run. Here’s what happens:
Every loan you apply for results in a hard inquiry on your credit reports, which can lower your credit scores by anywhere from zero to around five points. You can limit this damage by applying for car loans during a 2-week “rate-shopping” period, in which multiple inquiries only count as one.
Taking on a new loan increases your credit utilization ratio (how much debt you owe in comparison to your available credit), which lowers your scores. The number of points you lose will vary based on a few factors, including the size of the loan and other details in your credit reports.
On the bright side, your score can bounce back if you make your monthly car loan payment as agreed. With time, you can also gain points by reducing your loan balance and by using a mix of different products (credit cards and loans) responsibly.