How your car could wreck your chances of getting a mortgage
They're seemingly unrelated events, but this financial chain-reaction is something to keep in mind when you're car-shopping.
The next time you're in the market for a car, nowhere will you ever see a disclosure or a word of caution from the salesman about how financing that car could hurt your future chances for buying a house.
Unfortunately, auto loans will affect your ability to purchase a house, no matter how big or small the loan is. Lenders account for all liability payments the same. It’s not what you owe, but what you pay that counts.
So you could have a car loan for $30,000 and your balance has no bearing on your ability to close on a house; rather, it’s the payment associated with that balance that changes the game. This is key, especially if you proactively prepay your auto loan in an effort to pay off the debt faster.
If you choose to pay more, that's your prerogative, but for the purposes of qualifying for a mortgage, the minimum payments are king.
As for whether you lease or finance the car, it’s all the same. Let’s say you have a car payment for $500 per month and you have two more years left on your lease. That would count the same as a car loan for $500 per month with a longer-term obligation. The same reasoning applies to both: The minimum payment is what lenders will use to calculate how the liability will affect your ability to purchase a home.
How auto loans affect your credit score
Having a clean auto loan payment history will do wonders for your credit score, and a favorable credit rating will help you qualify for a mortgage. Conversely, late car payments can destroy a credit score, which can kill your chances of getting a mortgage.
Your payment history is the most important component of your credit score -- so late payments can cause your scores to drop in a big way. It’s a good idea to make monitoring your credit scores a part of your financial routine so that when you are ready to buy a house, you’ll be better prepared to work within your credit standing. You can monitor your credit scores for free on Credit.com, where you can get two credit scores, updated every month, with a plan to help you meet your credit goals.
Buy house or buy a car first?
If you know you need to buy a car and buying a house could happen in the very near future, it's often wise to buy the house first when your liabilities are lower. Because qualifying for a car loan does not require the extent of credit analysis a home purchase does, it makes more sense to close on the house first before you buy the car.
More from Credit.com
- Why you should check your credit before buying a home
- How to search for your next home
- How to get preapproved for a mortgage
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