How Car Loans Affect Mortgage Applications

Buying a home is exciting, rewarding, and for some, a dream realized. After all your hard work and dedication, you’ve finally saved enough cash to pay down debt, boost your credit score, and set aside a down payment. In your mind, you can picture it—the yard, the neighborhood, the space to call your own. Doesn't a shiny new car to match your perfect new home sound nice? Not always.

It’s important to realize that making a major purchase during the homebuying process, including a car, might hurt your homebuying power. This could potentially leave you with higher monthly mortgage payments, and in some cases, it could affect your ability to qualify for a home loan altogether. In this article, we’ll discuss how car loans can affect mortgage eligibility, best practices to secure a home loan, and how you just might be able to get the house and the car, too.

Does Having a Car Loan Affect Getting a Mortgage?

In short—yes, car loans can affect your ability to get a mortgage. When you apply for a mortgage, lenders look at several factors, including your debt-to-income ratio (DTI), credit score, and the amount of cash and appreciating assets you have on-hand. We’ll talk more about these factors in the next section, but for now, it’s important to realize that these all come together to paint the picture of your financial health.

When you take out a loan to make a major purchase, including a car purchase, you negatively impact each of these factors in the short term. This means that if you buy a car too soon before applying for a mortgage, your financial situation may not meet all mortgage qualifying requirements, ultimately leading to higher interest rates/monthly mortgage payments, and in some cases, total rejection.

However, longstanding car loans might improve your chances of securing a mortgage. If you have a car loan for which you’ve been making on time and consistent payments, you could increase your chances of securing a home loan with favorable rates. It might seem insignificant to you, but when it comes to big purchases, timing—even six months to a year—can make or break your homebuying budget and dreams.

How Getting a New Car Loan Can Affect Mortgage Approval

At this point, you know that purchasing a new car right before applying for a mortgage could lead to higher home interest rates, and in some cases, potential rejections, but why? Below are the top five ways new car loans impact your eligibility as a potential homebuyer.

1. Lower Credit Score

Taking out a new car loan can negatively affect your credit score short term. Your credit score is a three-digit number that's calculated by using the information on your credit report, including your payment history, debts owed, average age of credit accounts, number of hard inquiries, and credit mix. When you make on-time payments and have low amounts of debts owed, older credit lines, few hard inquiries, and a healthy credit mix, your credit score will steadily improve with time.

When you take out a new car loan, your lender will initiate a hard inquiry to verify your approval, which can drop your credit score anywhere from 3-7 points. After approval, a new car loan will increase the amount of you debt owe while simultaneously reducing the average age of your lines of credit—bringing your score even lower.

On paper, that three-digit number might not seem like much, but mortgage guidelines require a minimum credit score to qualify for the home loan. Borrowers with lower credit scores may qualify for loans at higher interest rates, or may find it more difficult to get approved.

2. Reduced Borrowing Power

Having a car payment can reduce your available borrowing capacity which can limit the amount of house you can afford. Mortgage lenders don’t just look at your income when considering how much they’re able to loan you—they also look at your spending. If a large sum of your gross monthly income goes toward other debts, including car payments, the less you may be able to borrow when it comes to a home loan.

Keep in mind that while lenders look at major debts such as car notes, credit card bills, and student loans, not all expenses such as groceries, gas, car insurance, and subscriptions. So, while a lender might offer you a loan amount that works with your new, higher car note, you should also consider whether you can comfortably afford the other costs that come with new cars, such as higher insurance premiums. Generally, it's ideal to keep your total debt spending, including mortgage, car notes, student loans, etc., to no more than 36% of your income. When considering mortgage affordability, the 28/36 rule is widely accepted, which says you can devote up to 28% of your income to housing costs and 36% to all debt.

3. Higher Debt-to-Income Ratio (DTI)

Similar to the last point, having a car loan increases your debt-to-income ratio (DTI), which could limit your buying power. Your DTI is calculated by subtracting your monthly debt payments from your gross monthly income. If more than 36% of your gross income goes toward paying off debts, some mortgage options may limit how much you can borrow.

4. Less Cash Reserves

A new car loan could also concern lenders if it reduces the amount of cash you have on hand for closing costs or a down payment. Mortgage lenders like to see that you have some cash set aside for all necessary closing fees, as well as a cash reserve or other liquid assets after closing. Since making monthly payments on a new car loan can reduce the amount of money you are able to save each month, lenders may view the additional debt as a factor that could impact your overall financial stability and ability to comfortably afford a mortgage. Furthermore, if you have to take from your savings in order to put down money on a vehicle, this may leave you with less money for a down payment, closing costs, or post-closing cash reserves.

5. Additional Credit Inquiry

During the underwriting process, mortgage lenders carefully review your financial profile to determine whether you qualify for a mortgage. If you open a new loan or line of credit right before or during this time, underwriters may flag it. As a result, newly opened credit accounts can lead to additional questions from your lender and may delay the underwriting process while the new debt is reviewed. In some cases, significant changes to your financial obligations could affect your loan approval or the terms for which you qualify. For this reason, borrowers are generally advised to avoid taking on new debt until after their mortgage has c

Best Practices When Applying for a Mortgage

If you’re interested in buying a home within the next year, there are a few Dos and Don’ts to keep in mind.

• Don’t get new car keys until you have your home keys: Purchasing a new car can impact your ability to be approved for a mortgage for at least six months to a year. If you’re looking into buying a new vehicle, you may want to hold off until you have closed on your home.
• Do keep your current debts low: If you have existing debt, continue to make on-time consistent payments to avoid late fees and additional charges. A low DTI is not just good for your credit score but also looks good to underwriters when determining whether you qualify for a mortgage.
• Don’t take out new credit: Taking out a new line of credit—whether it be a car loan or a credit card—can negatively impact your credit score and loan eligibility upfront. If you plan on purchasing a home, it is best to avoid taking out any new lines of credit until after you close.

Car Loans and Their Impact on Mortgage Applications FAQs

Still have questions about car loans and their impact on mortgage applications? Here are the most commonly asked.

Should You Pay off a Car Before Applying for a Mortgage?

It depends. Paying off your vehicle early can temporarily drop your credit score 10 to 30 points as it reduces your credit mix. If your car loan is the only installment account on your credit report, you may benefit from continuing to make on-time, monthly payments. If your credit portfolio is diverse, you might be able to pay the loan off and rebuild your credit within a matter of months.

How Do Mortgage Lenders Evaluate Multiple Debts?

Mortgage lenders evaluate multiple debts by reviewing your debt-to-income (DTI) ratio, which compares your monthly debt payments to your gross monthly income. They also consider factors such as your credit history, payment record, and the types of debt you carry. This information helps lenders determine whether you can comfortably manage an additional mortgage payment while meeting your existing financial obligations.

Can Buying a Car Delay or Stop Mortgage Approval?

Yes. If you purchase a car during the underwriting process, it can impact your amount of cash reserves, lower your credit score, and or raise your DTI—making underwriters pause approval of your application to request additional information. If your new financial situation changes your eligibility, your lender may withdraw or change the terms of their initial offer.

Should I Wait to Buy a Car Until After Closing?

Yes. Purchasing a car after closing is generally the safer option if you are in the process of obtaining a mortgage. Waiting until your home loan has funded and the transaction is complete helps prevent changes to your credit profile, debt-to-income ratio, or cash reserves that could affect your mortgage approval. It also eliminates the risk of additional underwriting reviews or delays caused by taking on new debt before closing.

Do Mortgage Lenders Check Credit Again Before Closing?

Yes, many mortgage lenders check your credit history again before closing to verify that your financial situation has not changed significantly since your initial application. They may look for new loans, credit cards, increased balances, or other changes that could affect your ability to qualify for the mortgage. If substantial new debt is discovered, the lender may require additional review before proceeding with closing.

Final Thoughts: Keep Your Mortgage Application on Track

If you’re looking to buy a new car and a home, you may have to carefully consider the timing of your purchases. While it is sometimes possible to qualify for a mortgage after taking on a new auto loan, doing so can affect your DTI, credit score, cash reserves, and overall borrowing power.

To help keep your mortgage application on track, it is generally best to avoid opening new credit accounts or taking on additional debt until after your home purchase is complete. If you are considering a vehicle purchase during the mortgage process, speak with your lender beforehand so you can better understand how it may affect your eligibility and avoid unnecessary delays.

Ready to start your homebuying journey? See if you can get prequalified today with Freedom Mortgage.