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Mortgage Tips

How Does Buying a Car Impact Your Borrowing Power?

Buying a home is likely the largest financial purchase you’ll make in your lifetime. The second? More than likely, it’s your vehicle. And, did you know that your car loan can negatively impact your mortgage qualification when purchasing a home?

When you apply for a mortgage, there’s a wide variety of information that you’re required to provide in order to qualify, particularly as it pertains to your current financial situation.

Based on the information at hand, potential lenders will determine whether you can afford your mortgage payments. If you have too much debt, such as a large car loan, there’s a risk your mortgage will be declined or significantly reduced with traditional lenders that offer the most competitive rates.

Keep Your Ratios and Credit in Checkover shoulder shot of woman driving a car with dashboard and steering wheel in focus

Lenders will compare the debt you have versus the credit you have (known as a debt-to-income ratio). Having a large car loan reduces the amount of money you have available to pay for other things including a mortgage. Obtaining financing for your vehicle also directly affects your credit score, which plays a significant role in the mortgage approval process.

That’s not to say you shouldn’t purchase a vehicle before buying a home, just make sure you can afford both. It’s always wise to check in with your mortgage broker before making major purchases leading up to your new mortgage approval or to renew or refinance an existing one.

Managing Your Car Loan

A manageable car loan demonstrates to a lender that you can make timely and consistent monthly payments, which will help build a healthy credit score. The longer you make consistent payments, the better. On the other hand, if you make late payments or miss a payment, this will have a negative effect on your credit score and lenders may determine that you aren’t able to manage your finances.

Have questions about your mortgage or how best to qualify? Answers to your questions are a call or email away.

Matthew Jackson
Mortgage Professional

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