Should You Buy a Car Before Buying a Home in Evansville, Indiana?
When your income starts to grow and you begin saving money, it is natural to want to make a big purchase. For many buyers, that first major purchase is a new car.
But if you are planning to buy a home in Evansville, Indiana, buying a car before applying for a mortgage can create problems.
A new car payment may feel manageable, but mortgage lenders look at your full financial picture. That includes your income, savings, credit score, monthly debts, and debt-to-income ratio. Even one new monthly payment can reduce how much home you qualify for.
Why Buying a Car Before a House Can Hurt Your Mortgage Approval
When you apply for a home loan, your lender reviews your monthly income and debts to determine how much mortgage payment you can afford.
If you recently bought a car, that monthly car payment is added to your debt. This can make it harder to qualify for the home price you want.
For example, a buyer may feel comfortable making both a car payment and a mortgage payment. However, lenders approve loans based on their underwriting guidelines, not just what the buyer feels they can afford.
That is why many buyers hear something like this from a lender:
“You would qualify for more house if you did not have this car payment.”
What Is Debt-to-Income Ratio?
Your debt-to-income ratio, often called DTI, is one of the key numbers lenders use when deciding whether to approve you for a mortgage.
Your debt-to-income ratio compares your monthly debt payments to your gross monthly income before taxes.
Your monthly debts may include:
- Future mortgage payment
- Property taxes
- Homeowners insurance
- HOA fees, if applicable
- Credit card payments
- Student loans
- Personal loans
- Car payments
- Other installment debt
The higher your monthly debt payments, the less room you may have for a mortgage payment.
How a Car Payment Can Reduce Your Home Buying Power
A car payment can reduce your purchasing power more than many buyers expect.
For example, if you earn $5,000 per month and add a $400 monthly car payment, that payment may lower the mortgage amount you qualify for. Depending on interest rates, loan program, taxes, insurance, and lender guidelines, that one car payment could reduce your buying power by tens of thousands of dollars.
That means the car you buy today could impact the home you are able to buy tomorrow.
This is especially important for first-time home buyers in Evansville, Newburgh, Vanderburgh County, and Southwest Indiana who are trying to maximize their price range.
Should You Pay Off Your Car Before Buying a Home?
Not always. Every buyer’s situation is different.
In some cases, paying off a car loan before buying a home may help lower your debt-to-income ratio. In other cases, using too much cash to pay off debt could reduce the money you have available for your down payment, closing costs, or emergency reserves.
Before making any major financial move, talk with a mortgage lender. A lender can help you understand whether it makes more sense to pay down debt, keep your cash available, or adjust your home buying budget.
Already Bought the Car? Do Not Panic.
If you already bought a car, that does not mean you cannot buy a home.
You should still get pre-qualified or pre-approved by a mortgage lender. The lender can review your income, credit, savings, debt, and loan options to determine what price range may work for you.
You may still qualify for a home loan, but your car payment could affect:
- Your maximum purchase price
- Your monthly mortgage approval amount
- Your loan program options
- Your down payment strategy
- Your overall buying timeline
The key is to understand your numbers before you start shopping for homes.
Planning to Buy a Home? Avoid New Debt First.
If you are thinking about buying a home in Evansville, Indiana, try to avoid taking on major new debt before speaking with a lender.
That includes:
- Buying or leasing a car
- Opening new credit cards
- Financing furniture or appliances
- Taking out personal loans
- Making large purchases on credit
Even if you are approved for the new debt, it could still affect your mortgage approval.
Before buying the car, financing the furniture, or opening a new line of credit, think about your bigger goal: buying a home.
Buying a Home Is a Long-Term Financial Move
A car may be exciting, but a home is usually a much more important long-term financial purchase.
Homeownership can help you build equity, create stability, and invest in your future. If buying a home is one of your goals, it is smart to protect your mortgage approval before making other major purchases.
The best move is to speak with a lender and a local real estate agent before making big financial decisions.
Ready to Buy a Home in Evansville, Indiana?
If you are planning to buy a home in Evansville, Newburgh, Vanderburgh County, or anywhere in Southwest Indiana, The Crick Team can help you understand the home buying process and connect you with trusted local professionals.
Before you take on new debt, make sure you know how it could affect your ability to buy a home.
