Buying a car and purchasing a home are two of the biggest purchases that you will make. You may not have considered how one may affect the other. Having a car loan can have either a positive or negative impact. It’s up to YOU to decide how it will affect you.
How Big is Your Car Loan Monthly Payment?
The size of the car loan’s monthly payments and how well those payments are maintained will all factor into your mortgage approval process. During the approval process, lenders look at a set of criteria, such as credit score and debt-to-income ratio, to help determine if a borrower is capable of paying back the loan. An auto loan can have a major impact on your credit score. This, in turn, has an impact on the likelihood of getting your mortgage approved.
Timing is Important Too
Making car loan payments on time will help increase your credit score. Missing a couple of payments could hurt your credit score and your chances of getting a home loan. Mortgage lenders will also assess your debt-to-income ratio, which is your monthly debt versus your take-home pay. This will help determine your ability to repay your mortgage. If a car loan pushes you over their set threshold, it may hurt your chances of being able to qualify for a mortgage. Moreover, a car loan will factor into how much you will be able to borrow for a home.
Is Your Payment Too Big?
Having a larger car payment will lower your borrowing power. It reduces the amount of income left to help service a new home loan and could be the difference between achieving a desired level of borrowing and falling a little short. This means that you could have less money to work with and may need to opt for a smaller or cheaper home.
Car Loans Can Also Be Good
While a lender will be looking at a set of criteria to help determine if you’re able to pay back a mortgage, a car loan can be used as a financial tool when they look at the set of criteria. Having a car loan can help improve your chances of getting a mortgage. If you have limited or poor credit, you can use a car loan to help build up your credit. Taking out a car loan 6 to 12 months in advance to applying for a mortgage will have a positive impact on your credit score. By making on-time monthly payments, your credit score will increase and help increase your likelihood of getting a mortgage.
Want to learn more about how your car loan can help you get a mortgage? Stop on in at Clinton Wilkins Mortgage Team!
If your mortgage is coming up for a renewal, stop by Clinton Wilkins Mortgage Team. We can help you find the best rate for your mortgage renewal.