Conventional wisdom states you shouldn't make any major purchases in the months before you buy a home, because doing so can cause your home loan application to be declined for a few reasons (e.g. too much debt). However, sometimes taking on a car loan can actually boost your chances of getting a house, but you have to be smart about the process. Here are two tips for buying a car before you purchase a home to ensure the transaction doesn't hurt your chances of getting a mortgage.
Wait at Least Six Months
Timing is everything when it comes to buying a vehicle when you are also working on purchasing a home. When you apply for the car loan, the inquiry will appear on your credit report, and an entry for the account will follow shortly afterwards (usually around 30 days). The reason why most experts recommend waiting to purchase a vehicle is because the mortgage company will see the entry for the car loan and recalculate your eligibility based on it.
Thus, you have two options. One is to apply for the car loan and hope you can close on the home before the account shows up on your credit report. This is a gamble, because creditors can report information on your report at any time, and the auto loan may show up when you least expect it.
The other, and better, option is to get the car and wait 6 to 12 months before applying for a home loan. One reason is because the hard query the auto finance company does will reduce your credit score a few points, which may to push you into a lower credit bracket with a worse interest rate or make you ineligible for the loan altogether.
For instance, conventional loans typically require you to have a 620 credit score. If your score is 626 and a hard query knocks off seven points, you'll fall below the minimum credit requirements, leading to either a higher interest rate or a declination.
However, the impact the query has on your credit diminishes over time and often become irrelevant after 12 months. But, you can also negate its impact and boost your credit score by making your car payments on time for several months. This can ultimately make it easier to qualify for your home loan later on.
Avoid Boosting Your Debt-to-Income Too Much
Another thing you can do when getting a car loan is to ensure your debt-to-income (DTI) ratio stays under 43 percent. Your DTI is the percentage of your income that goes to pay your bills. Home lenders want this percentage to be a low as possible because the more money you have after paying your debts, the less likely you are to miss your mortgage payment.
Thus, when negotiating your car payment, make sure it doesn't push your DTI to an unacceptable level. You can do this by calculating your existing DTI and using any difference as a maximum payment level. For instance, if you make $5,000 per month, the maximum amount of your debt can be $2,150. If your existing bills and projected mortgage payments amount to $1,800, then your car payment shouldn't be more than $350 per month.
If need be, either put up a larger down payment or get a longer car loan term (you can finance up to 84 months these days) to ensure your payments land in the preferred range. Alternatively, you can pay off more of your other debt to get your DTI below the 43 percent threshold.
For more smart tips on purchasing a vehicle before buying a home or help finding the right house for you, contact a local real estate agent at businesses like Reece Nichols Real Estate.