Why Auto Loans And Home Loans Do Not Mix

The next time you’re in the market for a car, do not plan on seeing a disclosure or a word of caution from the salesman about how buying that car with financing could adversely affect your chances for making a higher ticket purchase, like a house. Unfortunately, an auto loan will affect your ability to purchase a house no matter how big or small the payment is. Lenders account for all liability payments the same. Not what you owe, but what you pay that counts…

Lenders account for all liabilities based upon the minimum payment you’re obligated to make to your respective creditor. You could have a car loan for $30,000 and the balance has no bearing on your ability to close on a house, but rather the payment associated with that balance is a game changer. This is key, especially, if you proactively prepay your auto loan in effort to pay off the debt faster. If you choose to pay more, that’s your prerogative, but for the purposes of qualifying for a mortgage, the minimum payments are king.

Leased Or Financed?

Say you have a car payment for $500 per month, you have two more years left on your lease, that would be the same if you had a personal car loan for $500 per month with a longer-term obligation, same reasoning applies, minimum payment is what lenders will use to calculate how the liability will affect your ability to purchase a home.

Will Affect Your Credit Score

Having a clean auto loan payment history will do wonders for your credit score, actually helps you qualify for a mortgage, with a favorable credit rating. Conversely, auto loan late payments can destroy a credit score. Your credit score should be a bare minimum of 620 for mortgage eligibility these days. Understand if your credit scores lands in the 620 range, the lender is going to pay very close attention to your credit history as well as your capacity to handle a mortgage payment. They’re going to particularly keep a close eye on any pattern of payments related to any car loan you presently have or have had in the past, moreover, what the payment patterns reveal for showing good character.

How Buying Power Is Affected

Buying power is measured as the spread (difference) between income and liability payments, the bigger this gap is, the bigger the mortgage payment could be, translating into buying ability.

In other words, if you have payment obligations and your income is four times the amount of the minimum monthly payments are, that’s a healthy financial position to be in.

The logic is as follows…

For a ratio of 2:1, it’s every two dollars of income to offset one dollar of debt. For example if you have car loan payment at $400 per month, in order for that payment to not hurt your ability to buy a house, you need $800 in income to offset that debt. In practicality, next time you’re at the car dealership, and you’re taking on a$400 per month car payment and you know buying house is in your future, talk to your employer about that $9,600 a year raise or promotion you are eligible for. Why $9600 in this example? $9,600 per year on a monthly basis is $800 per month, which is the minimum income needed to offset a $400 per month car payment.

Quick mathematical takeaways to use when house comparing:

*For every $100,000 in purchase price that’s equivalent $725 per month on a total mortgage payment

*For every .125 in rate on every $100,000 financed that the payment change by $7.25 per month

*For $500 in mortgage payment that translates to upwards of $65,000 purchase price

Buy House Or Buy A Car First?

In short, depends on how far away you are from closing escrow on a house. If it’s a longer-term projection for getting your keys, and your income is poised to rise, may make sense to give credence to purchasing a house later on when financial stability is more grounded. On the other hand, if you know you need to buy a car and buying a house is in the imminent future, buy the house first when the liabilities are lower. Because qualifying for car loan does not entail the extent of credit analysis a home purchase does, closing on house first ahead of the car is a more makes sense move.

If the car purchase is a must and a home purchase is in the near future, first check with a lender to determine if you can qualify for the desired purchase price amount given your credit score, down payment capability, assets and debt ratio ( amount of current debt + proposed mortgage payment ÷ monthly income). If qualifying for your desired purchase amount becomes cumbersome things can become more tricky as you’ll need to pay off debt to qualify.

Paying Off Debt Pitfalls

Would be buyers take heed…..

Not all lenders allow you to pay off debt to qualify for a home loan. Some lenders might require you to pay off debt to qualify and subsequently close the account. Others simply won’t allow it wherein you would have to pay off the liability first in full, them authorize the lender pull a the credit report. Doing so, does not necessarily adversely affect your credit score so long as you’re not applying for different types of credit entities in around the same time you’re applying for a home loan. Lastly, if your pre-tax income is eroded by consumer debt like auto debts, even credit cards or personal loans, more significance is given to size of down payment, paying off the debt entirely, procuring more income or obtaining a co-signor.

Looking to purchase a home? How about  a second home or investment property? Start by getting a mortgage rate quote with us today, it’s completely free!

 

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RELATED MORTGAGE ADVICE FROM SCOTT SHELDON

When buying a home, it’s natural to want the lowest mortgage rate possible. But sometimes, chasing a slightly better rate from another lender—especially after your offer has already been accepted—can backfire in a big way. Let’s walk through a real-world scenario. You’ve got an offer accepted on a house. You’re working with a lender who has you approved, documents in underwriting, and a 21-day close of escrow in place. Everything is moving forward. Then you hear from another lender offering a rate that’s 0.25% lower, with slightly better closing costs. It’s tempting. But before you make a jump, here’s what you need to consider. Switching Lenders Comes with Time Costs When you pivot to a new lender mid-contract, they’ll need to: Re-underwrite your entire loan, Order a new appraisal, Disclose and sign new loan documents, Submit the file for final loan approval, Schedule and fund closing—all over again. This doesn’t happen overnight. Even in ideal circumstances, the new lender is likely going to need at least 25–30 days to close. If you’re in a fast-moving or competitive market, this is a real problem. Most sellers won’t grant a contract extension just because you’re switching lenders. So, what happens next? A Contract Extension Can Jeopardize Your Deal Asking for a contract extension means the seller must agree to delay closing. But that delay introduces risk—especially if the seller has backup offers or simply wants certainty. They may not grant the extension. Or worse, they could cancel the deal outright and take another buyer’s offer. Even if the seller agrees to extend, your earnest money and negotiation power could take a hit. And for what? A slightly lower rate that might save you $50 to $75 a month? Mortgage Rates Aren’t as Far Apart as You Think Here’s the truth: all mortgage lenders get their money from the same place—the bond market. The pricing differences between lenders usually range from 0.125% to 0.25% in rate on any given day. If one lender seems to be offering dramatically better pricing, the first thing you should ask is: How? Head over to FreddieMac.com and check the average 30-year fixed rate posted weekly. This is one of the most reliable benchmarks for where rates truly stand in the market. If a lender is quoting you a rate that’s well below that average, ask for the details: Are they charging extra points? Is this a teaser rate with a prepayment penalty? Is it based on a different loan product or risky structure? Often, what sounds “too good to be true”… is. Consider the Bigger Picture Think long-term. If you’re financing $600,000, a 0.25% lower rate may reduce your payment by roughly $75/month. But what if you lose the house and have to start over? That monthly savings doesn’t mean much if you’re outbid on your dream home or lose your deposit. Also, remember: you’re not going to keep this rate forever. Today’s homebuyers typically refinance when rates drop by about 0.75% or more. So if rates fall within the next year or two, you’ll likely be refinancing anyway. Instead of paying extra points now or risking the entire deal for a minor monthly savings, it may be better to accept a slightly higher rate—knowing you’ll refinance when the time is right. The Real Risk Isn’t the Rate—It’s the Delay When shopping for a home loan, don’t just ask, “What’s your rate?” Ask: Can you close on time? Is this rate sustainable or based on hidden costs? Will switching lenders delay or jeopardize my contract? A home purchase contract is a binding agreement between you and the seller to perform within a set timeframe. If you can’t meet those dates because you're chasing a slightly better rate elsewhere, you may want to reconsider if now is the right time to buy. Final Thoughts Yes, interest rates matter. But execution matters more. Before making a switch mid-transaction, talk to your lender. Have an honest conversation about pricing, timelines, and strategy. You might find that staying the course, securing the house, and planning to refinance later offers a better path to financial security. Want to Know Your Options? Let’s compare rates and strategies the smart way—without risking your dream home. 👉 Click here to get a custom rate quote today.

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