Did you know that one of the most common reasons that people don't get approved for mortgages is because they have a car loan and car payment so high that it would be hard for them to pay for a mortgage on top of it? Let us explain...
Why You Shouldn’t Put the Car Before the House
Having a reliable vehicle to take you from point A to B is a huge priority for many Albertans, and it is usually the first big purchase you’ll make in your life. But did you know that your monthly car payments could prevent you from getting the mortgage you need to buy the home you’ve always dreamed of? Taking on a car loan when you can’t handle the financial burden can and will hurt your chances of being able to get a mortgage in the future. So, next time you are searching the market for a new vehicle, there are a few things you need to remember before you do so. When you are at the car dealership, no car salesman is going to suggest that you take a moment to think about the financial commitment you’re about to make, they simply want you to buy an expensive car.
Because a car is essential for your daily convenience, people don’t usually think about the long-term effects it will have when you are looking to make a purchase on a home, they mostly just think about that if they can make the payments every month, buy it. Having a car loan that takes up too much of your monthly income or that you can’t afford to make payments on will negatively impact your chances of being approved for a mortgage.
Buying A Car Will Affect Your Credit Score
To be approved for a mortgage you should have a credit score of at least 650 (it varies depending on what lender you’re working with) but the higher the better. Since some credit inquiries impact your credit score, just applying for a vehicle loan, whether you ever take one out, can impact your score. The amount of your loan may also count against you, as credit-scoring models factor in the size of your outstanding debt as part of your debt-to-income ratio. The most important thing you can do before you decide to purchase a car is think about your financial future. Do you want to buy a house within the next couple of years? Is buying a house more important than getting an expensive car with a high monthly payment? It is essentially up to you to take control of your buying power and make sure that you have enough of it to buy a house in the future. It doesn’t matter if you are leasing or financing, your car loan will affect your credit score and buying power. It is so important to make every single one of your weekly or monthly car payments on time to have a great effect on your credit score which in the end will help you qualify for a mortgage.
Buying a Car Can Affect Your Buying Power
If you make your payments on time, your score will go up. If you miss a few payments, you will hurt your chances of getting a home loan. 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. Your buying power is determined by the difference (or spread) between your income and your payment obligations (in this case your monthly car payment). A bigger spread means you have more buying power and a smaller spread means you have less buying power. Having an auto loan that’s expensive and takes up a lot of your monthly income means that you have a smaller spread and less buying power, this can and will affect your ability to get a mortgage and buy a house. For example, if you make $1200 bi-weekly, you will have a bigger spread if your bi-weekly car payment is $200 as opposed to $400.
We know the importance of having a car, especially living in Calgary where public transit isn't as reliable and advanced as other cities and to most, having a car is essential. We simply suggest buying a reliable car within your means if you are wanting to purchase your own home in the near future. Instead of financing or leasing a $60,000 car, perhaps consider a $20,000 one. Your bank account will thank you, and your chances of being able to afford your dream home in the near future is much higher.
If you are in a situation where you're looking at buying a home AND a new car in the near future, we'd suggest buying the home first as in most cases, it is easier to get approved for a car loan than a mortgage. We've all heard the "everyone is approved!" ads for car dealerships, however the banks and lenders have a different view for mortgages where only those with good credit and debt-to-income ratios are accepted.