Will purchasing a car affect your ability to buy a home? Yes, and there are a few different ways a car purchase can impact your chances of being approved for a mortgage or closing on a new home.
It doesn’t matter if you buy a $20,000 car or a $100,000 car. In the grand scheme of things, the amount of debt is not as important as the monthly debt that goes along with purchasing a car. Your car payment will get calculated into your debt-to-income ratio, and some loan programs have higher debt-to-income ratio qualifications than others.
If you are pre-approved and already looking at homes at the top of your budget without that monthly car payment, buying a car could affect your ability to qualify. We will not close on a loan that does not meet the debt-to-income ratio requirements.
Buying a car can also impact your funds for closing. Sometimes when you buy a car, they require some sort of down payment to get into the vehicle. You might end up using funds that you had set aside for a down payment or closing costs. If you don’t have those funds available, you may not be able to close on the home that you are looking to buy.
Let’s say that you need to buy a car. What can you do so that you don’t hurt your chances of buying a home?
One thing we can do is look at the numbers and see what you could qualify for, what you’re looking for in a home, and what you need in a car. From there, we can see what that payment equates to in your debt-to-income ratio.
Every $50 in a monthly car payment can affect your buying power by about $10,000. If you get a $200 monthly car payment, you may have limited your mortgage by $40,000, and that’s a lot of house. It really depends on what you need and what works for you and your family. We can kind of reverse those numbers to make it work.
Another thing to consider when you go to buy a car is that the dealership will pull your credit. Some dealerships pull your credit 10 or 12 different times in order to get you the best rate or payment, and those are hard inquiries. If you come to us after you purchase a car, your credit score could be substantially lower. We also pull your credit during the mortgage process; interest rates are calculated largely based on your credit score. You may end up paying a higher interest rate because buying a car has lowered your credit score.
What if you pay cash for the vehicle?
If you pay cash, it’s not going to affect your mortgage loan whatsoever. We’re not going to see that on the credit report. Just make sure that you have set aside enough funds or assets for the down payment and closing costs for your home. Don’t deplete those to pay cash for a new vehicle.
Is there a difference between buying, leasing, or financing a vehicle?
There really isn’t a difference as far as qualifying for a new home. We’ll look at a monthly lease payment or car payment and calculate that in your debt-to-income ratio.
Let’s say you’ve had a lease for four years and the lease is about to be up. Even if you weren’t going to get a new lease, as your mortgage lender, we would still have to count that lease against you. Even if you only have a couple of payments left, you will have to get a new car somehow in order to get back and forth from work. The only way that would work would be if we could prove that you were paying cash for a new car.
As you can see, it may benefit you to wait until you close on your new home before you start looking for a new car.
If you have any other questions about what you can and can’t do during the mortgage loan process, just give me a call or send me an email. I would be happy to help you!