It seems like buying a shiny new car and purchasing a home go together. Wrong! Buying a car may feel like a necessity, but if you are planning to buy a home, wait until after.Buying a big ticket item on credit before buying or refinancing a house can make the difference between qualifying and not. It will ding your credit score, lowering it 40 to 60 points. It will increase your debt-to-income (DTI) ratio, and may knock you out of the park.
According to Kenneth Harney, Nation's Housing, "auto debt accounted for 81% of the increase in non-mortgage debt a month mortgage holders over the past 4 years".
While buying a new car makes you feel financially successful, in reality owning a home is one of the best financial decision you can make. You have to have somewhere to live and the benefits of owning your home usually include tax deductions that you don't get with a car.
Before buying a car, know that your DTI ratios are an important part of mortgage underwriting and are stricter and less flexible than they were a decade ago. Keeping your DTI ratios below 45%, with a maximum 50% for FHA, is important for obtaining a home loan.
So before buying a car or big ticket items on credit, consider what it will do to your DTI ratio and credit scores.
Virginia Hall
Keller Williams Realty
