How Long After Buying a Car Can I Buy a House?
When you’re planning to buy a house and wondering “how long after buying a car can I buy a house,” understanding the impact of a car loan on your mortgage eligibility is crucial. Let’s delve deeper into this topic and explore additional factors that may influence your ability to secure a home loan.
Car Loan’s Influence on Credit Utilization Ratio
One of the key factors that lenders consider when approving a mortgage is your credit utilization ratio. This ratio is the percentage of your available credit that you’re currently using. Ideally, you should keep this number below 30%. A car loan can significantly increase your credit utilization ratio, making it more challenging to qualify for a mortgage.
Inquiries and New Credit Accounts
Each time you apply for a loan or credit card, the lender performs a hard inquiry on your credit report. According to a study by FICO, individuals with six or more inquiries on their credit report are up to eight times more likely to declare bankruptcy than those with no inquiries. As a result, having multiple inquiries, including those from a car loan, can lower your credit score and affect your mortgage approval chances.
Loan-to-Value Ratio (LTV)
The loan-to-value ratio (LTV) is the percentage of the property’s value that you’re looking to finance through a mortgage. For example, if you want to buy a $200,000 house and have a $40,000 down payment, you’d need a $160,000 mortgage, resulting in an LTV of 80%. Generally, lenders prefer a lower LTV, as it indicates that the borrower has more equity in the property. A high monthly car payment can limit your ability to save for a down payment, thus increasing your LTV and reducing your chances of mortgage approval.
Lenders typically require mortgage applicants to have a certain amount of cash reserves, which are funds set aside for emergencies or unexpected expenses. The cash reserve requirement can vary depending on the loan program and the lender, but it generally ranges from two to six months’ worth of mortgage payments. A car loan can deplete your savings, making it more difficult to meet the cash reserve requirements for a mortgage.
Impact On Credit
Your credit score, a significant factor considered by mortgage lenders, could take a hit after purchasing a car. The reason? Acquiring a car loan involves a hard credit inquiry, which might shave a few points off your credit score. As per data from Rocket Mortgage, a single hard inquiry can cause a drop of up to five points in your credit score. Furthermore, the new debt from your car loan increases your credit utilization ratio, which can further lower your score if it’s not well managed. This decrease in your credit score can affect your chances of securing a mortgage, making you wonder “how long after buying a car can I buy a house?”
Impact On Debt-To-Income Ratio (DTI)
DTI is another critical factor mortgage lenders look at while determining your mortgage eligibility. It represents the percentage of your gross monthly income that goes towards paying your monthly debts. According to the Consumer Financial Protection Bureau, a DTI of 43% is typically the highest ratio a borrower can have and still get a qualified mortgage. When you take on a car loan, your monthly debt increases, which in turn raises your DTI. For instance, if your gross monthly income is $5000, and your total monthly debt payment (including the car loan) is $2000, your DTI becomes 40%. This high DTI might make mortgage lenders think twice before granting you a home loan.