Purchasing a car in Ontario may provide a convenient and thrilling means of transportation, but it’s important to recognize its potential impact on your mortgage approval. As mortgage agents, we often receive inquiries from clients about whether buying a car can affect their ability to get a mortgage. The answer is yes, and in this article, we’ll explore the ways in which it can affect your mortgage approval and provide tips to minimize any negative consequences.
When you apply for a mortgage, lenders look at your credit score, debt-to-income ratio, and other financial indicators to determine your capacity to repay the loan. Your total debt burden, which includes any existing loans or credit card balances, is one of the most critical factors assessed by lenders.
One of the most significant factors that mortgage lenders consider is your debt-to-income (DTI) ratio. This is the percentage of your monthly income that goes toward debt payments, including credit cards, car loans, student loans, and other obligations. If you take on a new car loan, it can increase your DTI ratio and make it more difficult to qualify for a mortgage.
To avoid this issue, it’s a good idea to wait until after your mortgage is approved before buying a car. Alternatively, if you’re set on buying a car before applying for a mortgage, consider paying off some of your existing debt first to offset the impact of the new car loan.
2. Credit Score
Your credit score is another key factor that mortgage lenders consider when evaluating your application. If you take out a new car loan, it can cause a temporary dip in your credit score due to the hard inquiry that the lender will make when processing your application.
To minimize the impact on your credit score, try to limit your car loan applications to a short period of time, ideally within a 14-day window. This will allow multiple inquiries to be treated as a single inquiry, which will have a smaller impact on your credit score. You can also work to improve your credit score before applying for a mortgage by paying down credit card balances and addressing any errors on your credit report.
3. Down Payment
Finally, buying a car can affect your ability to make a down payment on a mortgage. If you’re using savings to buy a car, that’s money you won’t be able to put toward your down payment. This can make it more difficult to qualify for a mortgage or result in a higher interest rate or mortgage insurance premium.
What steps can you take to mitigate any negative impact?
If you’re considering buying a car while also applying for a mortgage, there are a few things you can do to minimize the impact:
Wait until after your mortgage is approved
If at all feasible, wait to buy a car until your mortgage has been approved. This will keep your debt load and credit score steady during the mortgage application procedure. It will also give you a better idea of how much you can afford to spend on a car without significantly affecting your DTI.
Analyze your budget
If you decide to buy a car while applying for a mortgage, make sure you analyze your budget carefully. You don’t want to take on more debt than you can handle because it will affect your capacity to make mortgage payments.
Avoid applying for other loans or credit cards
While applying for a mortgage, avoid applying for other loans or credit cards in addition to purchasing a car. Every time you ask for credit, a hard inquiry is placed on your credit report, which might damage your credit score.
Pay off other debts first
If you have any other debts, such as credit card bills or student loans, you should pay them off before getting a car loan. This will reduce your DTI and make mortgage qualification easier.
Choose a cheaper car
If you do decide to purchase a car before applying for a mortgage, consider a less expensive option. This reduces your monthly payment and the impact on your DTI.
Increase your down payment
Consider putting down a greater down payment on your car if you can.
Consult with your mortgage broker
Finally, discuss your car-buying plans with your mortgage lender. They can explain how this decision may affect your mortgage application and advise you on how to proceed.
Feel free to contact us for assistance with your mortgage application.
We understand that buying a car and applying for a mortgage may be stressful experiences. At Cashin Mortgages, skilled advisors assist you through the procedure. If you have any questions regarding how purchasing a car may affect your mortgage approval, please contact us now to talk with one of our professional mortgage brokers.
We’re here to help!