Will Buying a Car Affect My Mortgage Approval?

How Do Mortgage Lenders Evaluate Applicants?

Mortgage lenders consider a number of factors when determining your readiness to finance a home, including your credit and income. Here are some specific factors that lenders look at:

• Your credit history: Mortgage lenders review your history of borrowing and repaying debts to evaluate how reliable you are as a borrower. Lenders look at your credit scores, payment history and credit utilization, among other factors.
• Your income and savings: Lenders look to see whether you have a steady income and assets that demonstrate your ability to make a down payment and afford your mortgage payments each month.
• Your debt-to-income ratio: Your debt-to-income ratio (DTI), or the percentage of your gross monthly income that goes toward debt payments, is a crucial factor for mortgage lenders because they want to ensure that you can afford to make your payments. It's generally best to have a DTI below 43%, though some lenders prefer lower than 36%.

Other factors, such as the size of your down payment and the loan type, also play into how likely you are to be approved for a mortgage.

Learn more: What Factors Do Mortgage Lenders Consider?

Should You Buy a Car Before Buying a House?

It's typically best to avoid taking out new credit—including a car loan—while you're trying to get approved for a mortgage loan. A car loan can impact each of the mortgage approval factors listed above, including your credit score, DTI and savings.

Some mortgage and credit experts recommend avoiding new credit during the six months to a year leading up to your mortgage application, just to be safe. Also, even if you've already been preapproved for a mortgage, taking on a new debt after preapproval could hurt your chances of getting a mortgage.

Learn more: Mistakes to Avoid When Closing on a Mortgage

How Buying a Car Impacts Mortgage Approval

Here's a more in-depth breakdown of a few different factors where financing a vehicle purchase can negatively impact your approval odds on a mortgage.

Credit Score

When you open a new credit account, it can cause a temporary dip in your credit score for two reasons. First, the hard credit inquiry can knock a few points off your credit score. Second, opening a new credit account reduces the average age of all of your credit accounts, which can negatively affect your length of credit history.

Debt-to-Income Ratio

One of the most impactful ways to get ready for a mortgage is to improve your DTI by paying off or paying down your existing debts. But taking on a new car loan will generally push your DTI higher, which can make it more difficult to be approved to buy a house.

As mentioned above, a common benchmark for a mortgage-ready DTI is under 43%, and in some cases, 36%. In other words, when you add up all your monthly debts and divide the total by your gross monthly income, the result should be no more than 43%. The lower, though, the better.

If a new car loan pushes you beyond that threshold, it could be more difficult to get approved.

Cash Reserves

When you're buying a home, it's important to have enough cash set aside for a down payment and to pay closing costs. With some loan programs, you may also need additional cash reserves on top of that. If you take some of that money and put it toward a down payment on a car loan, it could affect your approval.

Learn more: How Does Buying a Car Affect Your Credit?

When Buying a Car May Have a Lower Impact

It's usually a good idea to wait to buy a car if you're planning to apply for a mortgage soon, because a new car loan can make qualifying for a mortgage more difficult. That said, there may be some scenarios where it might make less of an impact:

• You pay with cash. You have enough cash to buy a car outright without compromising your mortgage down payment and closing costs, as well as applicable cash reserve requirements from your lender.
• Your DTI won't change or will go down. Your new auto loan has a similar or even lower monthly payment than your current one.
• Your credit score is high. Your credit score is in the upper 700s or even 800s and can absorb any minor, temporary damage caused by the hard inquiry and new account.

Tip: In any situation, think carefully about your options and how the proposed auto loan can impact you. It may be a good idea to consult with your mortgage broker or your loan officer to understand how lenders will view your decision.

Could Refinancing an Auto Loan Affect Mortgage Approval?

Yes, it's possible that refinancing an auto loan could affect your mortgage application. But there are pros and cons.

Refinancing your existing car loan can be worth considering if it can help reduce your DTI. Even if your credit score dips slightly with the inquiry and new account, it may not be an issue if your score is high enough to absorb it.

Another way to reduce your DTI is to pay down your auto loan or a different installment loan enough that you only have 10 or fewer payments left on the account. Once a loan gets to that point, mortgage lenders can exclude the payment from your DTI calculation.

Beyond targeting your auto loan payments as a strategy to lower your DTI, you can also postpone other large purchases to keep your credit card balances down and make other efforts to pay down small balances to eliminate the monthly payment.

Learn more: When Does It Make Sense to Refinance a Car Loan?

Make Your Credit a Top Priority in the Mortgage Process

A mortgage is a major financial commitment, both for you and the lender. As a result, it's best to keep your credit file in tip-top condition leading up to and during the mortgage approval process.

Experian's free credit monitoring service can help you by giving you access to your Experian credit report and your credit score powered by Experian data. Using the information, you can address potential issues that may affect your mortgage approval and also keep track of your progress.

If your credit isn't where you want it to be, consider taking the time to improve your credit score before you apply for a mortgage. This may delay important decisions, but it can help you save thousands or even tens of thousands of dollars in the long run.