Home Purchase Mortgage Calculators
Mortgage Program Calculators
In short, applying for a new car loan one-to-two months before you apply for a mortgage can negatively impact your ability to qualify for a mortgage. If buying a home is important to you, I recommend that you wait until your mortgage closes before your apply for a new car loan. Applying for a new car loan can hurt your ability to get approved for a mortgage for multiple reasons.
First, taking out a new car loan increases your monthly debt payments which hurts your debt-to-income ratio. We provide a comprehensive explanation of a debt-to-income ratio on FREEandCLEAR but in short, your debt-to-income ratio is the ratio of how much you spend on monthly debt payments including your housing expenses as well as car, credit card and student loans to your monthly gross income. Lenders apply a maximum debt-to-income ratio (usually 43% - 50%) to determine what size mortgage you can afford. Given how your debt-to-income ratio is calculated, the more money you spend on non-housing related debt, such as a car loan, the less money you can afford to spend on housing expense, such as your mortgage. So taking out a new car loan and incurring higher monthly debt payments typically reduces the mortgage amount you qualify for.
Applying for a car loan can also impact your credit score, which affects your mortgage application. When you apply for a car loan, lenders pull your full credit report which can reduce your credit score in the near-to-medium term. Taking on significant debt through a new car loan may also adversely impact your credit score in the near term. Your credit score should recover and potentially increase over time as you make the payments on your new car loan, but that process takes time. You want your credit score to be as high as possible when you apply for a mortgage because your score directly impacts your ability to qualify for a mortgage and what mortgage rate you pay. The higher your credit score, the lower your mortgage rate. We provide a thorough overview of your credit score and the mortgage process on FREEandCLEAR for you to review.
To summarize, you are thinking about the mortgage process the right way and certainly asking the right questions. If buying a home is your priority, I recommend that you hold off on taking out a new car loan until after your mortgage closes. This is a point I want to emphasize: if you do apply for a mortgage wait until your mortgage closes before you apply for a new car loan. Some borrowers apply for new car loans or credit cards after they submit their mortgage application but before their mortgage closes. That can also impact your credit score and debt-to-income ratio and undermine your ability to get approved for your mortgage. In short, it is a good rule to wait until your mortgage closes before applying for any new loans.
Finally, we always recommend that borrowers contact multiple lenders to understand how they would handle your unique situation. You can review lenders in your area by clicking INTEREST RATES We advise you to contact at least four lenders as qualification guidelines vary. Plus, shopping lenders is the best way to save money on your mortgage.