Why You Shouldn't Buy A Car Right Before Buying A House

An occasional but easy mistake that I see first time home buyers make before buying a house is to purchase a big ticket item like a car which they don't realize has a very real and negative effect on your mortgage application.

Typically, I notice that when an individual’s income starts growing and they manage to set aside some savings, they commonly experience what may be considered an innate instinct of modern civilized mankind: The desire to spend money.

Since North Americans have a special love affair with the automobile, this becomes a high priority item on the shopping list. Later, other things will be added and one of those will probably be a house.
However, by the time home ownership has become more than a distant and hopeful dream, you may have already bought the car. It happens all the time, sometimes just before you contact a mortgage broker to get pre- qualified for a mortgage.

As part of the application process, you may tell your mortgage broker your price target. He will ask about your income, your savings and your debts, then give you his opinion.
“If only you didn’t have this car payment,” he might begin,
“you would certainly qualify for a home loan to buy that house.”

Its like this, when determining your ability to qualify for a mortgage, a lender looks at what is called your “debt-to-income” or "debt-to-service" ratio.

What are debt-to- income ratios?
A debt-to- income ratio is the percentage of your gross monthly income (before taxes) that you spend on debt. This will include your monthly housing costs – including principal, interest, taxes, insurance, utilities, etc. It will also include your monthly consumer debt, including credit cards, student loans, installment debt, and…. CAR PAYMENTS!


How a New Car Payment Reduces Your Purchase Price
Suppose you earn $5,000 a month and you have a car payment of $400. At a 6% interest rate you would qualify for approximately $40,000 less than if you did not have the car payment.

If you haven’t already bought a car, I advise you to remember one thing: Think ahead. Think about buying a home first. Buying a home is a much more important purchase when considering your future financial well-being.