Buying a new car and a house are among the biggest and most exciting purchases in life. Although the two purchases seem completely different, a huge expense impacts how a lender views your borrowing ability. How you handle your auto loan will determine whether it has a positive or negative impact on your future mortgage application. Let's explore how these two loans work together.
The Link Between Mortgages and Car Loans
If you want to buy a home in the future, you might require a loan. If you previously took out a loan for a car payment, it will impact your mortgage. Mortgage lenders gauge your loan repayment ability during your application by considering the following factors:
Debt-to-Income Ratio
Your monthly debt settlement is determined by the portion of your gross income. A hefty car loan makes your DTI ratio unfavourable, making it difficult to secure a mortgage. Unless you increase your earnings, your vehicle debt will eat up your income and leave less for the mortgage. If you have strong finances, the vehicle loan will impact your mortgage amount and interest. A DTI of at most 35% is suitable to get your mortgage approved.
Total Debt Service Ratio
The TDS ratio is the sum of your debt payments plus housing costs relative to your income. Additional debts include student loans and credit card payments. Your TDS ratio should be at most 44% to increase the chances of your loan approval.
An auto loan on your debt list increases your TDS ratio. This is because more of your income will be channelled toward loan payments. This interferes with your eligibility to get mortgage approval.
Credit Score
Whenever you take out a loan, it’s recorded. The loan officer conducts a credit check during your application for a home loan. If they notice previous motor vehicle financing, they’ll want to assess whether you can handle the mortgage as well.
The presence of a new car loan will mean you have more debt, but it can be positive. Managing your monthly car payments well leads to good credit. Having a positive credit history increases the likelihood of your mortgage being approved. A minimum credit score of 650–680 is required for the approval of your mortgage loan. A higher score raises the chances of your loan application being successful. Consider this when deciding whether car finance is right for you. Taking a loan if you can’t handle the financial burden will hinder your future chances of getting a mortgage.
Will Your Car Loan Affect Your Mortgage?
Home buyers should have a clear understanding of their financial landscapes and implement the right strategies to boost their personal finances. If you want to complete your car loan payment before purchasing a house, there’s no impact. But if you want to apply for a mortgage while paying off your vehicle loan, there are various considerations you must make.
Consider the affordability of the car during the purchase, including the future mortgage payments. For all your financial aspirations, consider FFUN Financial. The company focuses on helping Canadians looking to build and establish credit while achieving their dreams.
