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In life, certain decisions are more significant than others. For example, purchasing a car and a house are some.
Suppose you're thinking about buying both a vehicle and a home. In that case, you're probably wondering quite a few questions, including, “what should I know about typical interest rates on mortgages and car loans,” “should I buy a new or used car,” and “how long after buying a car can I buy a house?”
Ready to learn about some of the most important things you'll need to know when buying a car and a house? This post aims to answer all those questions and more, providing you with a straightforward guide to making these two large purchases. Let's get right into it.
How Long After Buying a Car Can I Buy a House? Factors to Consider
When thinking about buying a car and a house, there are a few essential factors that you should keep in mind. After all, you don't want to have completed the purchases and realize that you unexpectedly can't make the monthly payments.
Here are some factors to consider when thinking about how long you should wait after buying your car to buy your house.
Your Credit Score
Before buying a home, you'll want to ensure that you have good credit. More specifically, you'll want to make sure that your credit history is as good as it can be and that your credit score is in perfect shape. Unfortunately, buying a car can negatively impact both (in the short term).
Making a vehicle purchase will require your lender to make a hard inquiry. A hard inquiry is when lenders send a legal request to the credit bureau to inquire about your credit score.
Typically, a hard inquiry will stay on your credit report for around two years and reduce your credit score by a few points. Then, on top of the hard inquiry, your lender will also need to open up a new account, which will further lower your score by a couple of points.
Of course, if you make every monthly payment on your auto loan, it will boost your credit score over time. But when you first borrow the money required to buy a car, there will be no credit history associated with the loan, and your credit score will initially suffer.
Having your credit score in good shape is important because bad credit can increase the interest rate you're able to get on your mortgage (potentially adding up to thousands of dollars over time). So before you rush into scrapping up a down payment for your home, be sure to get a copy of your credit report and make sure that your score is as high as can be.
Some ways you can make sure that your credit is in good shape are:
- Pay all your loan payments on time (car payments, previous mortgage payments, etc.).
- Pay all of your bills on time and in full.
- Use your credit cards responsibly (but still use them consistently as consistent credit card usage builds up credit).
Your Debt-to-Income Ratio (DTI)
Your debt to income ratio is a measurement of how much of your income needs to go towards paying off liabilities. Lenders look at this measurement to determine the loan rates they will apply to the house's purchase price. Also, when trying to apply for a loan, you'll have a much better shot to negotiate successfully with lenders if you have a higher DTI than lower.
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Any debt can count towards your debt-to-income ratio, including:
- Auto loans
- Home loans
- Student loans
- Personal loans
Of course, if you choose to buy a car right before purchasing a house, your debt-to-income ratio will take a significant hit as you add a substantial liability to your balance sheet.
You can use an online calculator to figure out your debt to income ratio and see if you can do anything to lower it. Always try to have the lowest debt-to-income ratio possible (not just because it makes you look more favorable in the eyes of lenders but also because it will help with your finances).
This factor ties to your debt-to-income ratio, but you add debt to your finances when you buy a car. This factor, combined with an additional mortgage, means that you will have a tiny cushion to withstand any shocks to your finances compared to before you made the two purchases.
Before you buy a home (especially right after you buy a car), make sure that you can withstand the additional payments on both purchases. Home-ownership isn't cheap. Thus, you must be fiscally responsible with your money. And, though you may work the numbers out on paper and get it to work, you'll still need to account for the fact that unexpected things can happen (a pipe breaks in the house, or a hurricane sweeps through the area, or the house catches on fire).
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Be sure that you're confident you can afford a home mortgage before taking one out. For example, suppose you realize that you can barely afford your mortgage loan with the additional loan payment from the car.
In that case, it might be a good idea to wait a few months to build up your reserves and also potentially improve your cash flow. Although your annual income can make you look rich on paper, you don't want to own a house you can barely afford, causing you to become “house poor.”
The answer to the question “how long after buying a car can I buy a house?” will depend entirely on your financial situation. The home-buying process looks very different for different people, and a car payment can also differ by hundreds of dollars every month.
Suppose you have very high credit scores, an extremely low debt-to-income ratio, and tons of discretionary income. In that case, you might be able to buy a house almost immediately after buying a car and still get favorable mortgage rates.
Suppose you have decent credit but a pretty high debt-to-income ratio and not too much discretionary income. In that case, it might be a wise move to wait anywhere from 6 to 12 months (and up) to build up your credit score (after 12 months, your credit score should bounce back if you've made timely payments), earn some extra income, and potentially add to your income streams.
Finally, you might check your credit reports and realize you have a low credit score, a high debt-to-income ratio, and little discretionary income. It might be a good idea to reconsider buying a car in the first place.
A car loan can significantly hurt your finances, especially if you buy a new car when you're not financially stable enough to withstand the hit. If this sounds like you, one suggestion is to look at used cars or be highly meticulous in the car-buying process, not overextending yourself financially. Then, once you've settled in with the vehicle over time and built up extra income, you can start thinking about buying a house.
Other Related Questions
Chances are, if you're thinking about making a car purchase and a house purchase, you have more questions than just how long you should wait before buying one after the other. So here are the answers to some other related questions you might be wondering.
Does Buying a New Home Affect Your Credit Score?
Though being a responsible homeowner can indeed help you build your credit score over time, in the short term, your credit score can drop quite significantly (up to 14 points!). Like car loan lenders, mortgage lenders may pull your credit history and make a hard inquiry before finalizing the loan.
How Is a New Auto Loan Different from a Home Loan?
A car loan and a mortgage are similar in many ways, including that both have collateral behind them (one is your car and the other is your house). The main difference is that you will make mortgage payments amortizing. Car payments will typically be towards simple interest add-on loans or simple interest amortizing loans.
Does Leasing a Car Affect Your Credit Score?
If you make all the payments on time, leasing a car can positively impact your credit score. Plus, a lease is a different type of credit that you can add to your credit mix, further benefiting your credit score (the more types of credit you have, the higher your credit score). With that said, if you miss a payment, it could be very damaging to your credit score.
Recap: How Long After Buying a Car Can I Buy a House?
Buying a car and buying a house are major financial decisions in life. If you've been considering making these purchases, you've likely wondered to yourself, “how long after buying a car can I buy a house?” So, before giving your 30-day notice to your landlord, make sure that you do everything you can to make the process as smooth as possible and ensure that you're not making any financial mistakes.
As a quick recap, there are three main factors you should think about when considering this question:
- Your Credit Score – After buying a car, your credit score will initially dip, but it will recover over time as you make timely payments.
- Your Debt-to-Income Ratio – With an additional liability added to your balance sheet, your debt-to-income ratio will rise. A higher debt-to-income ratio might raise the mortgage rates lenders are willing to give you and make buying a house more unfeasible.
- Your Cushion – With an additional car payment you need to make every month, you'll need to consider that your cushion will also be significantly smaller.
The amount of time you should wait to buy a house after buying a car depends entirely on your financial situation. As long as you consider all the relevant factors and make sure that you are making a wise financial decision that will not negatively impact you in the long run, you should be good to go.
This article originally appeared on Wealth of Geeks.
Jonathan Sanchez is a real estate investor and personal finance blogger for Parent Portfolio. He owns a small real estate business that operates a couple of investment properties in his local market. He aims to help others understand their money and generate passive income. He’s also been featured in Business Insider, USA Today, and FOX Business.