Buying a car can affect your credit score—and your home purchasing power—in a variety of ways. If you hope to buy a home soon and can afford to wait to get a car, it might make more sense to buy a house first.
Did you know that buying a car before you buy a home could impact your ability to get a mortgage? Find out more below about the relationship between buying a car and buying a home. Then, make educated decisions about whether you should buy a car or a house first.
In this piece
- Why can buying a car before buying a house be a bad idea?
- When should you buy a car before a house?
- Can you get a car loan after buying a house?
Why Can Buying a Car Before Buying a House Be a Bad Idea?
Adding any new credit line or loan will affect your credit score in a few ways—and not always for the better. Buying a car also adds to your debt load, which can make you appear to be a riskier borrower. That could mean mortgage lenders are less likely to approve you for a mortgage loan. And, if you take on a large debt such as a car loan, you might be less able to afford the payment on the home you really want.
1. Buying a Car Can Affect Your Credit
Buying a car will impact your credit—unless you pay for it in cash. Some of these effects can be positive: Having a clean auto loan payment history can do wonders for your credit score. And a favorable credit rating does help you qualify for a mortgage.
However, it takes a while to build up that payment history, so an auto loan isn’t going to immediately boost your credit. And if you’re not paying your car loan on time, those late payments can hurt your credit score.
Another way buying a car can impact your credit score is by changing your credit mix. Creditors like to see that you can handle different types of debt responsibly. If you’ve only ever had revolving credit such as a credit card or store account, adding an installment loan can potentially bump your score up in the future.
The act of applying for a car loan can temporarily reduce your score, too. Lenders do a hard inquiry when you shop for car loans, which can drop your score a bit. This might lead to a situation where your score is slightly too low to get the mortgage deal you really want if you apply immediately after buying a car.
2. Buying a Car Limits Your Purchasing Power for a Home
Getting approved for a mortgage doesn’t just come down to your credit score. Mortgages are big debts—often the largest debt obligation people take on. Lenders want to see that you have the buying power to pay your mortgage on time and in full every month.
Your buying power is essentially the difference between your income and your existing liability payments. The bigger this gap is, the more room you have to accommodate a mortgage payment. This is also referred to as your debt-to-income ratio.
Your debt-to-income ratio is the percent of your income that goes toward debt. According to the Consumer Financial Protection Bureau, most mortgage lenders will only approve someone if their debt-to-income ratio falls at 43% or below—including their new mortgage payment. That’s because lenders know you need the rest of your money to pay for living expenses and save for the future.
Buying a car before buying a house can alter those numbers enough to keep you from getting approved for a mortgage. Consider the example below.
Let’s say someone makes $3,500 a month, and they have debts totaling $450 each month. In this situation, 43% of the person’s income is $1,505. They already have $450 in monthly debt obligations, which means most lenders would consider approving them for mortgages with payments of $1,055 or less. If they have good credit and all other factors are favorable, they stand a good chance of being able to buy a home.
Now, consider the difference if that same person bought a car before buying a home. If the car payment is $500 per month, that brings their total monthly debt payments to $950. That substantially lowers their buying power when looking at homes. It’s unlikely this person would qualify for a mortgage with a monthly payment more than $555.
3. Your Preapproval Could Fall Through
If you did the smart thing and got preapproved for a mortgage loan, that’s great. But if you get a car loan between that preapproval and closing on your home, you might find that your funding dried up. That’s because preapproval is based on your finances and credit at the time it was given, but final approval is based on your situation at the time underwriting occurs.
When Should You Buy a Car Before a House?
Whether or not you buy a car before you buy a house is a personal decision that depends on a variety of factors. Here are some common times when people might do so.
When Your Income and Debt-to-Income Ratio Can Take It
If you have a high income and low debt, adding a car loan may not impact your ability to buy the house you want.
For example, if you have an income of $5,000 a month, 43% of that is $2,150. If you only have $500 in existing debt, you could add a $500 car payment and still potentially get approved for a mortgage with a monthly payment of $1,150.
That being said, you shouldn’t max out your debt-to-income ratio just because you can. And you should also be cognizant of your monthly expenses. If you have a large family, expensive hobbies, or medical needs, any of these could mean you need more than 57% of your income each month for things that aren’t debt.
When You’re Not Buying the Home for a While
If your home purchase plans are in the distant future, you may be able to purchase a vehicle without it impacting your ability to get a mortgage later. This is typically true in two cases.
- You’re not buying a home for three or more years, and you can pay for the car in that time. If you want to buy a home in four years and you can afford a three-year car loan, this might actually help. Make all your payments on time and your payment history could help your credit score.
- You’re planning to buy a home before your car is paid off, but you also expect your income to increase. If you buy a car that costs $400 a month, that’s $4,800 per year. If you expect your income to go up $10,000 a year before you buy a home, your car won’t be a concern for debt-to-income ratio.
Note: The housing market in 2021 is very competitive. Housing inventories were at a record low in January 2021, and that trend has continued. What that means is that there simply aren’t a lot of houses available on the market. That’s driving up the cost of those that are for sale, and you may find yourself competing against other buyers.
When Getting the Vehicle Isn’t Optional
Mortgage lenders like to see that you have a steady income. That’s good for them, because it makes it more likely you can pay your loan on time every month. If you need reliable transportation to get to your job or otherwise make that income, you may not have a choice in whether you buy a car or home first.
Can You Get a Car Loan after Buying a House?
Buying a car could make it more difficult for you to get a mortgage loan for the home that you really want. However, car loans are typically easier to get, as they don’t involve as deep a dive into your credit and debt-to-income situation.
If you can wait, you might consider getting a car after you get your home. In fact, if you have credit good enough to qualify for a mortgage and you don’t do anything to jeopardize that, you may find that you’re able to access numerous car loan options after you buy a house.
Can you buy a car before buying a house? Sure. But only you can decide if it’s wise for you to do so. Consider signing up for ExtraCredit or the Credit Report Card so you know what you’re dealing with as you make these decisions.
