Can you do it?
Buying a home can be a really eye-opening experience. There's so much to learn, from the details of the real estate market to the process of getting a mortgage. One question you may have as you prepare for this big purchase is whether or not you can buy a new car at the same time that you're shopping for or buying a home.
This is a complex question. The concise answer is that while it may sometimes be possible to buy a house and car at the same time, it's not usually a good idea to do so. Here's why.
Buying a car can negatively impact your debt-to-income ratio.
If you have already applied for a mortgage, the bank based the amount that they were willing to lend you on your debt-to-income ratio. If you now go out and buy a car, that will increase your debt-to-income ratio, which may cause the bank to reduce the amount they are willing to lend you. They could even pull back their loan offer completely.
Buying a car can consume a lot of your down payment and closing funds.
Hopefully, you have plenty of funds set aside for your home down payment and closing costs. Most buyers end up needing more than they realize. You don't want to spend a portion of your savings on a car and then realize you no longer have enough to close on your home.
Buying a car can negatively impact your credit score.
If you have had a car loan and paid it on time for many months, that can actually raise your credit score and make it easier to get a mortgage. However, right after you buy a car, it is common for your credit score to drop temporarily. This mostly occurs after a lender does what is called a "hard inquiry" into your credit report. If you then apply for a mortgage with this lower credit score, you may not be approved, or you may be assigned a higher interest rate because you're presumed to be a riskier borrower.
So, if you're buying a home and are also in need of a car, what should you do? The best option is probably to delay your car purchase until after you have closed on the home. If you cannot do that, then purchase a very affordable car—preferably in cash—and plan to replace it with a higher-priced vehicle once you're in your new home.
A third option would be to buy your car now, and then wait about six months before you shop for a home. This should give your credit score some time to recover and also allow you some time to save more money to put towards your down payment. Do make sure you calculate your debt-to-income ratio and ensure it will still be below 36% after the purchase of the car and the home. If you spend too much on the car, you may need to lower your house budget to remain within this accepted ratio.
Buying a car and a home at the same time is not usually a good idea. Since banks look closely at your credit and accounts when you apply for a mortgage, it is best to defer large purchases, such as the purchase of a car, until after you buy a home. If you do need both a home and a car, make sure you don't overspend on the car, and keep an eye on your credit and debt-to-income ratio.
Equal Housing Lender