Should I Buy A Car Or House First? How To Decide
Lauren Bowling4-minute read
May 26, 2021
Ah, adulthood: an entire world of new possibilities and financial decisions. If you’re in the fortunate position of having steady income and a little bit in the bank, you may be wondering “Should I buy a car or a house first?” The answer depends on your own set of circumstances, but if you’re worried about a car loan impacting your ability to qualify for a mortgage, read on.
How Does A Car Loan Affect Your Ability To Get A Mortgage?
When reviewing a home buyer’s credit-worthiness, lenders look at all existing loans: car loans, student loans, and private loans too. Lenders are especially interested in car loans as these are monthly payments that can affect a buyer’s ability to meet their mortgage payments.
Impact On Credit
Whether applying for a car loan or a mortgage, you’ll need a good credit score. Typically, lenders look for a minimum credit score of 620 for conventional loans and 580 for FHA or VA loans. Having a car loan on your credit file will impact the following:
- Debt-to-income ratio (30% of credit score)
- Payment history (35% of credit score)
- Length of credit history (15% of credit score)
An individual's credit score is made up of a mix of factors but making on-time payments is the biggest part of your score and the most important factor. Making on-time auto loan payments will go a long way toward showing home lenders you are a trustworthy borrower, especially if you had a thin credit profile prior to obtaining an auto loan.
If you have a low score or are working to build credit for the first time, buying a car may be the better first step.
Impact On DTI
While having an auto loan certainly won’t keep you from homeownership it will impact how much home you can afford (or how big of a mortgage you’ll be able to take on.) This all comes down to the aforementioned debt-to-income ratio (DTI) and your income.
Here’s a very simple example of how debt-to-income ratio works. This example assumes that the lender needs the client to maintain a DTI ratio of 37%, but your DTI may be higher or lower depending on your other qualifications and the loan option you’re using. Other assumptions include a 15% down payment and 3.25% interest rate.
- Sally Homeowner makes $40,000 per year before taxes, or a gross income of $3,333 per month. Sally is debt free, except for a $20,000 loan on her car, which let’s say comes to $360 per month.
- To get a rough DTI calculation, just divide Sally’s debt ($360) by her gross monthly income ($3,333) and you get a debt-to-income ratio of 11%.
- After factoring in her auto loan, a lender would qualify Sally for a rough monthly housing payment of up to $873.21, or a home priced around $200,642 or less (depending on interest rates at the time of borrowing.)
- If Sally had a more expensive car with a $35,000 loan (a $630 monthly payment), or owed money on student loans, for example, keeping the DTI the same and only qualify for a monthly mortgage payment of $603.21, or a home in the $163,000 price range.
The example above illustrates how when you borrow money, it isn’t necessarily about the price of what you’re buying, but the cumulative amount you can afford to pay across all your debt obligations that impact how much you can afford.
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Buying A Car Vs. Buying A House First: Things To Consider
While home buying may be the better investment long term, it may not be tenable to get by in your location without a car. Whether to buy a home or a car first comes down to the following considerations.
Do I Need A Car For My Current Lifestyle?
If there are few public transit options in your area and you need a vehicle to get you reliably to and from work, then it’s important to buy a car first. You can’t build wealth without employment!
Is Home Buying Affordable In My Area?
If you live in an area where real estate values are high, purchasing a home may be unattainable as a first-time buyer on an entry-level salary. Often, the answer to the question, “Should I buy a home or a car first” is out of necessity – it’s easier and faster to save the down payment on a $20,000 purchase than a $200,000 one, so naturally many opt to obtain a vehicle first.
How Much Money Do I Have In Savings?
Due to products like the FHA mortgage loan, home buyers can obtain a home loan for as little as 3.5% of the purchase price; but having the minimum 3.5% doesn’t always mean it’s time to buy. Saving and putting more money down means you’ll have more equity in the home when you do buy, pay less in interest over time, and avoid private mortgage insurance that comes when buying a home with less than 20% down.
Should I Wait To Refinance My Auto Loan If I Want To Buy A House?
While refinancing offers benefits such as lowering your monthly payment and overall debt-to-income ratio, there’s a reason real estate agents, mortgage brokers, and financial experts recommend home buyers put off all major purchases until after closing – it can seriously derail a real estate transaction!
Here’s why: When you apply for a loan (whether it be a new loan or refinance of existing loan) it impacts your credit score. A hard inquiry could potentially lower your score, and any new lines of credit will impact your overall debt-to-income ratio. Since lenders offer home loan interest rates based on your score, if your score changes at the last minute, so will your interest rate, and then the underwriters at the bank then have to go back and underwrite your loan all over again.
Not only could your interest rate increase, but any last-minute credit score shake ups will definitely delay your closing.
The Bottom Line
Whether you buy a home or a car first really comes down to your lifestyle, the accommodations in your area (like public transit) and your own personal financial goals. There’s really no bad way of hitting these important financial milestones, so long as you’re smart about the timing and protecting your credit along the way.
For more information on how to qualify for a mortgage, visit the Rocket Mortgage® learning center.
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