Purchasing a vehicle or a house will impact your monthly budget, debt-to-income ratio and credit scores. Deciding which to buy first will come down to your individual goals and circumstances.
You Might Have to Buy a Car First
If you can use public transportation, carpool or work remotely, having your own vehicle might not be a necessity. If those aren’t options, you might have no choice but to buy a vehicle now so you can get to work.
A Car Loan Might Keep You from Getting a Home Loan
When you apply for a mortgage, a lender will consider your debt-to-income ratio. It’s calculated by adding up all your monthly debt payments and dividing by your gross monthly income. Taking out a car loan will increase your DTI ratio. You might be unable to get a large enough mortgage to buy the house you want, or any mortgage at all.
Buying a Car Can Make It Hard to Save for a Down Payment
People often struggle to save enough to make a substantial down payment on a home. While you can buy a house with little or no money down, you’ll have to pay for private mortgage insurance if you take out a conventional loan with a down payment of less than 20%. That can add hundreds of dollars to your monthly housing costs. You can avoid PMI if you put down 20%, but that will be hard to do if you have a car loan with a large monthly payment.
An Auto Loan Can Affect Your Credit
Your credit scores are based on several factors, including your total debt load, payment history, mix of account types and average amount of time you have had the accounts. Taking out a car loan will increase the total amount of money you owe to creditors and reduce the average age of your accounts, which can have a negative impact on your credit. On the other hand, consistently making loan payments on time can help your credit. The net impact will depend on your individual circumstances.
Create a Plan That Fits Your Goals
Think about your current circumstances and lifestyle, your financial goals and when you hope to achieve them. If you need a car now, you can look for an affordable used model with a relatively low monthly payment. Taking out a loan will increase your DTI ratio, but that might not be a problem if you can pay off the loan before you buy a house or if you expect your income to rise.
If you plan to buy a house in the near future, taking out a car loan can make it difficult to get approved for a mortgage. If you can get by without a vehicle for now, it can be better to save for a down payment on a house and buy a car after you move into your new home.
