Are you thinking about buying a home or a car in the near future? Maybe you’re even hoping to purchase both. There’s no doubt that these are two of the biggest purchases you’re likely to make in your lifetime. On top of that, your loan for a car can also affect your ability to qualify for a home loan. Although these seem like two completely different areas of spending, big expenses always have an impact on how a lender views your borrowing ability. It’s how you handle this overlap that decides whether a car loan has a positive or negative impact on your future mortgage.

Consider the size of your car loan

Do you already have a car loan? If so, think about how big your monthly payments are. Lenders will look at your debt-to-income ratios when they consider whether or not to approve you for a home loan. If your car loan is too huge, a lender might only approve you for a smaller home loan. This means your budget will have to be lower, and you’ll need to find a cheaper home than you may have initially expected. 

No matter what, having a car loan means having less available credit to support a home loan. However, if you don’t have a car yet, you can plan ahead. If you know your car and home loans are going to overlap, you can look for a smaller car loan now. This will leave you with more credit and income to support your future home loan.

Make payments on time

As you likely already know, missing any kind of payments will lower your credit score. This includes things like internet, cable, and hydro bills, for example. However, a car loan will probably be one of the largest loans you have, meaning it will also come with some of the biggest payments. Missing these payments can have an even bigger impact on your credit score, since it shows you’re inconsistent with larger amounts of money. 

Lenders usually have a set range of acceptable credit scores they like to work with. While they can be flexible, your score shouldn’t fall too far out of range. If it does, a lender might reject your home loan application. Their concern is if you can’t always pay your car loan on time, you might not be able to repay an even bigger home loan.

Benefits of a car loan

So far, you might be thinking it sounds like having a car loan can only be dangerous to your home loan application. It seems like there are no benefits, just constant risks. However, you can work a car loan in your favour to improve your odds of being approved for a mortgage. You can use your car loan as an example of how responsible you are with making payments for big expenses. Consistently making payments on time will improve your credit score, which will show lenders you can likely pay back home loan costs. This is an especially useful tactic if your credit score is on the lower side right now. If you’re confident in your abilities to pay it back, you can get a car loan to work on getting your credit score in shape for your home loan application.

Is it best to avoid an overlap?

At the end of the day, should you just completely pay off a car loan before you get a home? Should you focus on getting a home before getting a car? For a lot of people, this isn’t a reasonable answer. Cars are essential for many people, especially those who don’t have reliable access to other transit. Most people also need a car before they want to buy a home, so you shouldn’t have to delay fulfilling your transportation needs.

Since car loans take some time to pay off, you’ll likely want to buy a home before you’re totally out of the woods on your car payments. If you’re lucky enough that you can avoid an overlap, go for it. If not, don’t worry too much. Focus on making your payments on time, and try to get a car within a reasonable price range. This will give you a smaller car loan, which will leave you with more income left for a home loan. A lot of people will prioritize getting their ideal home over their dream vehicle. If you care more about securing the right home, pay more attention to the kind of credit you need for that loan.

Buying a home and a car are both major purchases, and it’s definitely possible to have both! The key is to be smart about your payments and understand how one affects the other. If you have questions about applying for a mortgage, reach out today! Give us a call at Centum Home Lenders at 506-854-6847, or get in touch with us here.