How Buying a Car Affects Buying a House

How Buying a Car Affects Buying a House

Written by Caitlin Wood
Last Updated October 13, 2020

Having a car is definitely a priority for the average person and it’s more often than not the first big purchase you’ll probably make in your life. But did you know that your monthly car payments could prevent you from getting the mortgage you need to buy the home of your dreams?

Because cars are such a necessity, people often buy them without much thought of the distant future. Getting the car you’ve always wanted and being able to make the payments each month are often the only issues considered when it comes to purchasing a new vehicle. This is fine if you’re not looking to make any other financial investments in the future but if you’re looking to buy a house, it could be a serious problem. Having a car loan that takes up too much of your monthly income or that you can’t actually afford to make payments on will negatively impact your chances of being approved for a mortgage, here’s everything you need to know before you commit to a car loan.  

Buying a Car Will Affect Your Credit Score

No matter how you look at it a car loan will affect your credit score but it’s up to you whether it has a positive or negative affect. Making on time car payments will have a great effect on your credit score which in the end will help you qualify for a mortgage. On the other hand making late payments on your car loan will have a negative effect on your credit score, this will hurt your chances of being approved for a mortgage. If you know that buying a house is in your future and you need a car loan now you should consider using your car loan as a financial tool to help you improve your chances of being approved for a mortgage. No one can force you to make responsible financial choices so it’s up to you.

In order to be approved for a mortgage you should have a credit score of at least 700 (it varies depending on what lender you’re working with) but the higher the better. You should keep this in mind when deciding if a car loan is the right choice for you. Taking on a car loan when you can’t handle the financial burden can and will hurt your chances of being able to get a mortgage in the future, make sure you consider this before you make any decisions.

Buying a Car Can Affect Your Buying Power

Your buying power is determined by the difference (or spread) between your income and your payment obligations (in this case your monthly car payment). Generally speaking, a bigger spread means you have more buying power and a smaller spread means you have less buying power. Having an auto loan that’s expensive and takes up a lot of your monthly income means that you have a smaller spread and less buying power, this can and will affect your ability to get a mortgage and buy a house.

The most important thing you can so before you decide to purchase a car is think about your financial future. Do you want to buy a house within the next couple of years? Is buying a house more important than getting an expensive car with a high monthly payment? No car salesman is going to suggest that you take a moment to think about the financial commitment you’re about to make, they simply want you to buy an expensive car. Therefore it’s up to you to take control of your buying power and make sure that you have enough of it to potentially buy a house in the future.

Which Should You Buy First?

This is obviously completely up to you. Although most people either need a car or are able to buy a car long before they can afford to buy a house. So what we want you to do is to buy a reasonably priced car, one that you can afford to make payments on now and in the future if you should ever want to buy a house. Nice expensive cars are great when you’re young and don’t have a mortgage to pay for but not so great when you do have mortgage payments.

Thinking about and planning for the future when it comes to your finances is extremely important. Buying a car can affect your ability to buy a house but it doesn’t have to prevent you from getting the home of your dreams.

Rating of 3/5 based on 22 votes.

Caitlin is a graduate of Dawson College and Concordia University and has been working in the personal finance industry for over eight years. She believes that education and knowledge are the two most important factors in the creation of healthy financial habits. She also believes that openly discussing money and credit, and the responsibilities that come with them can lead to better decisions and a greater sense of financial security. One of the main ways she’s built good financial habits is by budgeting and tracking her spending through the YNAB budgeting app. She also automates her savings so she never forgets to put aside a portion of her income into her TFSA. She believes investing and passive income is key to earning financial freedom. She also uses her Aeroplan TD credit card to collect Aeroplan points so that she can save money when she travels.

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