Buying a new drive or hoping for a new home? Doing both might be a crap shoot

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Published Date 5/24/2024

It’s not hard to imagine how great it would feel. Buying a shiny new car to grace your brand new driveway. But if you’re buying a home and considering buying a car at the same time, think again. Taking out a car loan while getting approved for a mortgage might put a kibosh on your homeownership dreams, according to Realtor.com’s Angela Colley.

“When you apply for a car loan, the size of your monthly payments and how well you maintain those payments can factor into your mortgage approval,” says Colley. “An auto loan can have a big impact on your credit score, which in turn has a big impact on whether you will get approved for a home loan and what rates you will get.” She explains how, when you apply for an auto loan, the inquiry will appear on your credit report and lower your credit score temporarily.

Great credit? Probably nothing to worry about. But if the inquiries reduce your score from a 701 to a 699, for example [below the lender’s credit threshold], it could impact your mortgage rate.

Of course, how you manage your auto loan will also affect your credit. Making payments on time makes your score go up. Missing a few or racking up late fees can hurt your chances of getting a home loan. Lenders use an equation called your DTI (debt-to-income) ratio, made up of the amount of your monthly debts versus your take-home pay in order to determine your ability to repay your mortgage. “Under the new qualified mortgage rules, your monthly debts—including your auto loan—cannot exceed 43% of what you bring home,” says Colley. “If your auto loan pushes you above the limit, you may not qualify for a home loan.”

But wait. There’s more. When you apply for pre-approval on a mortgage, lenders will compare your debt-to-income ratio and housing expenses such as property taxes and insurance to determine how much you can borrow for a home. If you have a large car payment to make each month, it will lower your borrowing power.

Colley consulted with mortgage loan consultant Peter Grabel, who says, “A $430 auto payment [could] reduce your mortgage borrowing power by $100,000.” Bottom line? Less borrowing power means less money to work with. That means you may have to opt for a smaller or cheaper home if you cannot raise the additional funds yourself.

“If you are planning to apply for a mortgage in the near future—six months or less—you should avoid applying for any type of credit if possible,” said Grabel, since taking on a large loan can affect your credit rating and your debt-to-income ratio.

One more important detail: Don’t confuse a pre-approval with final approval. “Your credit will be monitored up to the day of closing,” Grabel said. “If this new debt causes your ratios to go over the limit, your loan may be jeopardized, even if you were previously approved and cleared to close.”

If you’re saving money to buy a home, however, taking out a car loan and paying in on time well before qualifying for a mortgage might have a positive impact if you have limited or poor credit. “If you take on a car loan six to 12 months before applying for a mortgage and make timely payments, your credit score will increase,” says Grabel. “Mortgage lenders typically like to see at least three active trade lines.” If your credit is limited, having a well-managed auto loan works in your favor.

Realtor,,TBWS

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