A car loan can affect your mortgage application in a negative way, by reducing the amount of mortgage you qualify for. A car loan can increase your debt-to-income ratio, which can lower the mortgage amount you qualify for.
An automotive financing car loan will show up on your credit report, and lenders take the monthly payments into account when deciding how much mortgage you can qualify for. It is one of the reasons some investors choose to purchase their own vehicles, as this avoids an extra monthly debt.
Even if you make monthly car payments on time – your mortgage lender will still consider the payments as a monthly debt expense. In today’s society, a car is sometimes considered a necessity more than a luxury – as it’s also used as a means of earning income (such as Uber, DoorDash and deliveries).
The loan application for purchasing a vehicle is very different from purchasing a home. You can qualify for a car loan much easier than qualifying for a mortgage. It is primarily because the loan value is lower, resulting in lower monthly payments. However, when applying for a mortgage, the application requirements are much more stringent.
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A Car Loan Will Impact Your Credit Score
If you decide to finance or lease your car, the lender will always verify your credit report. This credit check is considered a hard check, and can cause a hit on your score. If you do not miss monthly car payments, this can help boost your score in the long-term. However, missed car payments can cause a negative affect on your credit history and score.
Each mortgage lender will have a minimum credit score requirement for their application. If you have a low credit score; a car loan application could potentially do harm to your chances of qualifying for a mortgage.
It is one of the reasons why most people avoid purchasing a home right after purchasing a vehicle. In some cases, homebuyers may go out and purchase a vehicle right after receiving their pre-approval – and this is not recommended for everyone. When the lender goes ahead with the mortgage approval and adjudication process – they will run your credit report. During this time, your report would show the recent vehicle purchase – which has done two things to your credit:
- Your credit score has taken a hit due to the hard check from the car loan application
- Your credit report now shows your debt has increased by the monthly car payment
How Long Does it Take for a Car Loan to Show on Credit Report
A new car loan can take 30 to 60 days to show up on your credit report and history. You should ask your car finance lender about their rules on credit reporting, and how often they report to the credit bureau.
Your credit report will show the credit authorized, which is the full amount of the car loan that was initially granted to you. The other items reported include the number of months you missed payments, the monthly payments and how long the car loan has been reporting on your report. One of the benefits of a car loan is the credit building ability of this product. If you need to build credit, you can use a car loan to build up your credit.
There are some benefits of paying off car loan early, as you will be saving on the money you spend on interest charges. In addition to this, you can benefit from the following:
- Receiving ownership of the vehicle sooner than later
- Increase your monthly cash flow
- Lower your debt to income ratio
If you choose to pay off your car loan early, this can also help you with qualifying for a mortgage. Your car loan will no longer show up on your credit report as an active loan, and you will be able to qualify for a higher mortgage amount. With increased disposable income every month – your mortgage lender will ensure you qualify for higher purchase price for your home.
How Does Car Loan Affect Mortgage
A car loan will increase a borrower’s debt-to-income ratio, which will affect the mortgage application. Currently, some lenders require the debt-to-income ratio to be lower than 43%. If your auto loan causes your debt-to-income ratio to go over the threshold, it can lead to a denial of your application.
Your auto and car loan can reduce your borrowing power when purchasing a home.
It is estimated that a $500 monthly car loan or lease payment can lower the mortgage amount you qualify for by about $88,000. This can vary depending on how much your down payment and incomes are – but this is based on the current average.
As you can see, a car payment or any other debt can make a dramatic impact – which can make or break your real estate purchase deal. If you are worried about how much you may be able to qualify, we recommend speaking with a mortgage broker. A mortgage broker is someone who works on behalf of all the lenders (banks and other smaller lenders) – so they are not biased to one lender.
Should You Pay Off Car Loan Before Getting Mortgage?
You should pay off a car loan if your debt-to-income ratio is higher than the required amount to qualify for your mortgage. Your mortgage broker will be able to tell you if paying off your car loan will help you qualify for your mortgage.
For some people, it is better to pay off a car loan before applying for a mortgage, as it will help them qualify for the amount of mortgage they need to make their purchase. As long as your debt-to-income ratio is within the threshold deemed acceptable by the lender, you will be fine. However, a lender will always be more inclined to offer a better rate to someone who has a high credit score, low debt-to-income ratio and a high downpayment.
It is important to weigh the pros and cons of the situation and see if it is worthwhile.
Can You Add a Car Loan to Your Mortgage?
Yes, you can add a car loan to your mortgage. The process is known as a mortgage refinance, where you receive cash from the equity in the home. You will use the cash to pay off your car loan, and the debt is now on your mortgage.
If your car loan is under a high interest rate, and you have an open loan – a cash-out refinance may be a good option if you can get a better rate on your mortgage. However, if your sole purpose is to consolidate your car loan with your mortgage – this may not be best option. A refinance is recommended for a larger cash need, such as investing into another property, paying off large debts or renovations.
In conclusion, we always recommend speaking with a financial professional prior to making large purchases; such as a home or car. When deciding which to purchase first, you should always be cautious about how each purchase can impact your credit score, credit history and debt-to-income ratio.
