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Should You Buy a Car Before You Apply for a Mortgage?

Should you buy a car before you get a mortgage or wait? If I buy a car now, should I pay cash or get a loan and how does that impact my ability to qualify for a mortgage?

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru

In general, we recommend that you put off any major purchases such as buying a car until after your mortgage closes. As we explain below, buying a car can make it more challenging to get approved for a mortgage for multiple reasons.

If you get a loan to buy the car, the monthly loan payment is included in your debt-to-income ratio when you apply for a mortgage. The higher your monthly debt expenses, the lower the mortgage you can afford.

For example, adding a $450 car loan payment to your debt-to-income ratio can decrease the mortgage amount you qualify for by tens of thousands of dollars, depending on your interest rate and other factors. If your monthly debt payments are too high you may not be eligible for the mortgage you want.

Use ourMORTGAGE QUALIFICATION CALCULATORto determine the mortgage you can afford

Applying for a car loan can also cause your credit score to drop moderately, at least temporarily, which creates another potential challenge when you apply for a mortgage. In short, for many loan programs, having a lower credit score means you pay a higher mortgage rate.

Paying a higher rate increases your monthly payment, reduces the mortgage you can afford and can cost you thousands more in interest expense over the course of your loan. So while a dip in your credit score is never a good thing, it can be especially harmful if your score drops right before you apply for a mortgage.

This is why we recommend that you wait until after your mortgage closes before you consider applying for an auto loan. At that point, you have already bought the home and your loan terms do not change if you buy a car.

The table below shows mortgage terms for leading lenders in your area. We recommend that you contact multiple lenders to confirm their qualification requirements. Shopping lenders is also the best way to save money on your mortgage.

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Current Mortgage Rates as of July 5, 2020
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Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. Click for more information on rates and product details.

One way to avoid the potential negative impact of a car loan on both your debt-to-income ratio and credit score is to buy the car with cash, assuming you have sufficient financial resources. With this approach your total monthly debt expense does not increase and your credit score should not be affected because you do not need to apply for a car loan.

The key point to keep in mind if you pay cash for the car is to make sure that you have enough funds remaining to pay for the down payment on the home you want to buy plus closing costs and any reserves you may be required to hold. Most mortgage programs and lenders require you put down at least 20% of the property purchase price to receive the best loan terms including the lowest mortgage rate -- although it is certainly possible to qualify with a lower down payment.

If your down payment is less than 20% you may be required to pay a higher mortgage rate or private mortgage insurance (PMI), which increases your monthly payment. So if you do not have sufficient funds to both buy the car and pay for your down payment and closing costs, hold off on the card until you buy the home.  If you have enough money leftover to pay for your down payment, however, then buying a car with cash should not affect your ability to qualify for a mortgage.

In closing, while we advise you to put off buying a car until after you get a mortgage, if you absolutely cannot wait then you may be better off paying cash, at least from the standpoint of qualifying for a mortgage. If you cannot pay cash then it is important to understand how the car loan affects the mortgage you can afford as well as your terms.

Sources

"B3-6-02, Debt-to-Income Ratios."  Selling Guide: Fannie Mae Single Family.  Fannie Mae, February 5 2020.  Web.

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About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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