Two of the biggest and most exciting life purchases are a new home and a new car. But which should you purchase first? With a smart financial strategy, you can budget for both a vehicle and a home, but you’ll need to know how to time your purchases. With ease, here’s your roadmap for a mortgage application and a car loan.
A little math goes a long way
When applying for a mortgage or a car loan, lenders want to see your debt-to-income ratio. This calculation compares your recurring debt to your gross monthly income. Here’s a quick, simple example:
Your monthly mortgage or rent is $1,300, your auto loan is $500 every month, and your remaining debts (such as credit cards, student loans, etc.) combined are $200 per month. Add it all up, and your recurring monthly debt is $2,000. Next, we’ll pretend your average monthly gross income is $5,800. To find your debt-to-income ratio, we divide your monthly debt by your monthly payment. In this case, it’s 34.5%.
- Monthly debt: $2,000
- Monthly income: $5,800
- Debt-to-income ratio: 34.5%
Figure out your household debt-to-income ratio to secure a good position for a home and auto loan. Consider all the expenses of owning a home, such as property taxes and homeowners’ insurance. In most cases, you need a 43% or less ratio to get a home loan, but 36% or less is ideal. That means that buying a new car before buying a home can impact this ratio and reduce your purchasing power.
You should also check your credit score. The better your score, you should receive better loan terms. Paying all your bills on time will help boost your score if it needs some attention. Understanding where you sit financially will help you budget and have an informed conversation with your lender while applying for a mortgage or an auto loan.
Timing is everything
You did the math, and the numbers aren’t painting a pretty picture. Perhaps you’re discovering that your finances need a little work before applying for a car loan, or a mortgage. However, there are other options you can consider! First, look at what you truly need right now. If you don’t need a car right away, prioritize your home first. It’s also easier to get a car loan than it is a mortgage, so that could come after you’ve closed on your home.
However, life happens, and perhaps you need a vehicle right away. If this is your situation, you do have options. For example, consider purchasing an older, used car instead of a new one. Your monthly car payments will be lower, which will improve your overall financial outlook to lenders. At the end of 2021, the average new car loan was $37,746, while the average used car loan was $26,230.
If you do have the savings, you may be able to purchase a car with cash and avoid buying on payment terms altogether. Leasing is another option that often yields lower monthly rates. As you move through buying or leasing a car and also applying for a mortgage, count the number of credit pulls. Too many in a short period can ding your score!
Financial cleanup is crucial
Cleaning up your finances is empowering and financially savvy. Plus, it’s another way to afford both a home mortgage and an auto loan. You can improve your loan applications by:
- Saving up for a more significant down payment. You’ll need to show how much money you can put down upfront when applying for a mortgage. You’ll likely receive better lending terms if you save for a larger down payment.
- Work on paying off your vehicle quickly. If you’re still making car payments, work to eliminate that debt soon since this improves your debt-to-income ratio.
- Consider your total debt load, such as credit cards, personal loans, student loans, etc. As discussed earlier, these impact your financial picture in a big way. If you can clean up these lingering debt items, you’ll be on solid ground when applying for a mortgage.
Be aware that buying a car shortly before a home could put you in a difficult financial position, even if you’re already preapproved. Always speak to your loan officer before making any major purchases. These will affect your mortgage application. Additionally, you might find that purchasing a car after a home is much easier.
Though the timing can be tricky, your dream of owning a new car and a new home is possible. If your life goals include a new home with a new car in the driveway, trust the experts at First Centennial Mortgage to guide you through the process. Contact us today to learn how we can personalize the application process for you.