Buying a Car VS Getting a Mortgage
What’s the right order?
When looking to take out a loan to make a major purchase, it is imperative to discuss credit score. The credit score you need to qualify for a mortgage depends on what type of lending you’re pursuing.
FHA, or VA loans tend to have more lenient credit requirements. For example, you can qualify for an FHA loan with a credit score as low as 580, and if you put a substantial down payment, you may be able to qualify for some of these mortgage loans with a credit score as low as 500. Most commercial lenders for conventional loans are looking for credit scores of 660 and above. And if your credit score is 740 or higher, you qualify for premium rates.
Buying a car with an auto loan impacts you in several ways. In the positive side, having a clean auto loan payment history can boost your credit. Creditors also like to see a combination of different debt on your credit history, so if you’ve only ever had revolving credit such as a credit card, adding an installment loan can potentially bump up your credit score.
On the flip side, any late payment can cause your credit score to drop in a big way; more importantly, having an auto loan offsets your debt-to-income ratio. The debt-to-income ratio is the percent of your income that goes toward debt, and a ratio that is too high will limit the mortgage you can qualify, because the bank knows you need the rest of your money to pay your other bills. As a side note, personal loans fall under the same category, so be very careful about your financial actions prior to taking out a mortgage.
The debt-to-income ratio is the percent of your income that goes toward debt.
That being said, whether you buy a car or house first, depend on your timeline. Are you in your credit-building phase? If you are not buying a home in the next 3–5 years, in that case, purchasing a car and making sure you make all payments on time will help you get a higher credit score. Or if you expect your income to increase substantially, it may help offset the debt-to-income ratio, in which case you should consider buying a car first.
Outside of these circumstances, it almost always makes more sense to buy the home before you get the car. Auto loans are typically easier than mortgage to get, as they don’t involve as deep a dive into your credit and debt-to-income situation. So, if you buy a house before you buy the car, you can get both. It’s the best of both worlds’ scenario.
About the Author
Danny Lau has set up several successful small businesses, he is a top real estate sales professional, and he shares real estate investment advice through his YouTube Channel.
Disclaimer
This article is intended for informational purposes only and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.
