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If you are like most people, you will need to buy a new car at some point in your life. However, what happens when you find yourself needing to buy a new car and purchase a new home at the same time or within a particular time frame? In this article, you will find out why timing is everything.
Those who are in the process of buying a new home need to be aware of some of the factors that might influence their ability to do so. Even though credit score, income, and assets will play major roles in whether or not someone might be approved for a loan, there are other factors that will play a role as well.
Buying a new car might even have an impact on the homebuying process. As a result, you should speak with your loan officer first if you are considering a new car purchase or adding any other debt to the equation. That said, here’s why?
There are multiple ways to buy a car. Some people elect to pay cash for the entire vehicle. While this is a challenge for most families, this will prevent any new debt from being added to the family’s finances. At the same time, this could also reduce the amount of cash the family has on hand to put toward the new home.
Most families end up putting a down payment on a car and taking out a loan for the rest. While this is a financially responsible decision, this can also make it harder to purchase a new home. This is because the payments on the car are going to be added to the family’s existing debt, and let’s not forget that a new car purchase impacts your credit score.
In fact, an auto loan can have a significant 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. The reality is when you secure an auto loan, the inquiry will not only appear on your credit report, but it will also lower your credit score temporarily. That said, if you have good credit, then you may be in the clear. However, if your new car purchase inquiry reduces your score greatly, then it may very well impact your mortgage rate. Along those same lines, how you manage your auto loan will also affect your credit score. For instance, if you make your payments on time, your score tends to go up. But, when you miss a few payments, the chances of getting a home loan or mortgage you need are greatly reduced.
It is important that you remember, lenders use your debt-to-income ratio (or the amount of your monthly debts versus your take-home pay) to determine your ability to repay your mortgage. Depending on the type of loan you’re applying for, your total monthly debts essentially cannot exceed 43-50 percent of what you bring home. Consequently, if your auto loan pushes you above the limit, then your new vehicle or car impacts the ability to buy a new home—so much so that you may not even qualify for a home loan.
Similarly, if your new car comes with a rather large auto payment, then your borrowing power may be negatively impacted. And even after getting approved, a potential lender is going to see these large debt payments and lowered credit score, and possibly reduce the amount of money they are willing to provide. Clearly, this could make it hard for a family to purchase their dream home.
In order to prevent your mortgage borrowing power from being reduced then, it is important to keep in mind that an improved credit rating, spending less, paying off debts, and shopping around for a better deal—including better auto loans and lower payments—is key.
If you are looking to purchase or buy a home in six months or less, then you need to avoid any major changes to your credit score and debt-to-income ratio. Note, do not forget what happens at the pre-approval step is not set in stone. In other words, avoid the mistake of exceeding your debt-to-income ratio after being approved; if you do exceed the limit after the fact, then your dreams of homeownership may be dashed before you can get to closing.
Alternatively, if there is no way of getting around a car purchase in the near future, then those who need a new vehicle need to factor the monthly cost of the car into the home buying equation. For example, if the monthly payments on the car are going to be $200, then this is $200 less that the family can afford for the mortgage payment. The same math has to be done with money due at signing, and the funds saved for a down payment on a new home—the funds allotted for the car’s down payment is money that you could have used for the down payment on your new home.
That said, it is not all doom and gloom if you purchase a new vehicle in the same timeframe that you are trying to close on a home. If you have poor or not-so-great credit, then buying a car 6 to 12 months before applying for a home mortgage may help to build your credit back up or increase your credit score—if you make timely payments.
Ultimately, people need cars to get around in most parts of the country. Therefore, the financially responsible decision is to take the cost of the car and deduct this from the assets that are available to pay for the home. This will help you avoid any surprises and be on the same page as your lender. If you need assistance with this or tackling any of the above-mentioned concerns, you should absolutely speak with your loan officer before you do anything first. In fact, you should speak with your loan officer before you make any significant changes to your finances in general.
Are you curious about mortgages, or are you ready to apply for one to buy a home? If so, Sammamish Mortgage can help. We are a local mortgage company from Bellevue, Washington, serving the entire state, as well as Oregon, Idaho, and Colorado. We offer many mortgage programs to buyers all over the Pacific Northwest and have been doing so since 1992. Contact us today with any questions you have about mortgages.
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