Did you know that buying a car before you buy a home could impact your ability to get a mortgage? Unless you pay for it in cash, purchasing a car will impact your credit score and could have a negative impact on determining your eligibility for a mortgage, as well as how much you can borrow.
The average monthly car payment for a new car is $738 and $532 for used cars, according to credit report agency Experian.
Berk Karrer, is a local lender with more than 20 years of experience. He has seen buyers miss out on the home of their dreams because their car payment held them back. “Having an average new car payment can reduce your home buying power by $120,000!,” said Karrer.
When it comes to purchasing a home, your buying power is the difference between your income and your existing debt. This is commonly referred to as the debt-to-income ratio. The bigger this gap is, the higher your ability to make a mortgage payment. According to the Consumer Financial Protection Bureau, most mortgage lenders will only approve someone if their debt-to-income ratio falls at 43% or below— including their new mortgage payment.
CAR PAYMENT STATISTICS:
- The average monthly car payment for new cars is $738.
- The average monthly car payment for used cars is $532.
- 42.30 percent of vehicles financed in the fourth quarter of 2023 were new vehicles.
- 57.70 percent of vehicles financed in the fourth quarter of 2023 were used vehicles.
Source: Bankrate
AMERICANS NOW OWE $1.6 TRILLION IN CAR LOAN DEBT
The amount of auto loan debt has only grown in recent years. According to Federal Reserve (FRED) data from the fourth quarter of 2023, Americans owe $1.61 trillion dollars in auto debt. This is up $55 billion from the same time last year and $12 billion from last quarter.
INTEREST RATE ON AUTO LOANS COMPARISON
Credit score New cars Used cars
781 to 850 5.64% 7.66%
661 to 780 7.01% 9.73%
601 to 660 9.60% 14.12%
501 to 600 12.28% 18.89%
300 to 500 14.78% 21.55%
Source: Experian State of Automotive Finance Market fourth quarter 2023
CAN YOU BUY A CAR AND A HOUSE AT THE SAME TIME?
The short answer is - it depends. It’s always advisable to discuss major purchases with your lender while under contract. Especially, if you are adding debt. “Prioritizing a home purchase is almost always the best move. Cars generally depreciate quickly, homes appreciate, paving the way for generational wealth in our vibrant neighborhood, “ said Karrer.
