Can a car loan prevent you from getting a mortgage?

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You probably never thought that buying a new car could prevent you from getting a home mortgage. This is one of several steps that you should consider carefully before applying for a large loan.

Mortgage lenders will scrutinize your financial history to make sure you can handle the payments, and the large, newly acquired debt burden will withstand you. So if you are serious about buying a home, think carefully before rushing into buying a car that requires a loan.

If you were to line them up, your mortgage would usually be one of the biggest purchases you ever made, and therefore you need to be sure that you are in the best possible position, ”says Melissa Rich, Vice President of Home Lending Draper and Kramer Mortgage Corp.

Below are some of the financial factors that mortgage lenders take into account and how getting a car loan might affect them.

Credit rating

The addition of any new line of credit or loan can affect this sacred credit rating.

“Every time you take out an installment loan, [like a car loan] or open a new credit card, the credit bureaus will immediately conduct a thorough inquiry on your credit report, ”says Rich. “The goal is for them to want to see in a couple of months how you, as a consumer, respond to this new line of debt – are you going to handle it responsibly?”

Rich says this is not a bad thing in the long term, but in the short term it can lower your credit rating by a few points, which as a result can affect your ability to qualify for a mortgage and get the best interest rate.

Debt to income ratio

“One of the most important factors in determining your home budget is the Debt to Income Ratio, or DTI,” says Jay Jay Lester, a certified specialist in financial planners, options and real estate at Personal Capital.

Your DTI is your monthly debt payment divided by your monthly income before tax. If your debt obligations are higher than the money you make, you look more risky to lenders.

“When you take out a car loan, it goes against your income and eats up your debt-to-income ratio, reducing your purchasing power in terms of what you can afford,” says Rich. Ultimately IIf you have a sizable monthly payment for your car, this can affect whether you qualify for a mortgage or the amount you can borrow.

Lester says that your external DTI is a percentage of your monthly gross income that is spent on housing costs, which lenders generally require lenders not to exceed. 28% of your gross income… Your internal DTI is a percentage of your gross monthly income that goes towards all debt payments such as mortgages, credit cards, and other loans that lenders usually require. no more than 36%

Big purchases

The two most common big purchases people make in their lives are a new car and a house, but timing is everything.

“We always advise people to wait and make other big purchases, like a car, after they close the house,” says Rich.

She talks when she thinks about buying a house and new car, it’s best to talk to your mortgage lender first.

“Indicate what time frame you have for buying a home and what the car loan will be, and ask how buying a car will affect the numbers that the lender is offering you,” says Rich. “Yes, things can change, but it is better to be prepared and make an informed decision based on possible scenarios.”

The term of your car loan

Experts say that payment history is one of the most important pieces of information in determining your creditworthiness. Consequently, a long history of car loan payments can actually increase your credit rating and show lenders that you are capable of making payments on time. This is one of the ways that a car loan can really help you get a mortgage.

But when a new line of credit is opened, such as a car loan, it can lower your credit score because it shortens the length of your overall credit history.

“If you go out and get a car loan tomorrow and then want to buy a house next month, you won’t have enough time to demonstrate that you can handle that line of debt responsibly,” says Rich. This is why it is wise to set aside enough time between getting your car loan and applying for your mortgage.

Rich says it may take two months for some people to have a loan installment have a positive impact on their credit, while for others it may take six months or more.

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