Buying A Car During The Home Loan Process, What Can It Hurt?

One of quickest ways to get “Unapproved” for the loan on your dream home is to do something that negatively effects your credit score during the home loan process. One of the first conversations we have with all clients (good or not so good credit) is notifying them to NOT make any major purchases while building or buying a home. That means NO new car, new boat, furniture, electronics, etc… until the loan is closed.

To better understand why or how this will effect you, I will give you an example of a client with good credit that buys a new car during the home loan process and the real cost of buying that new car. Oh, and the “Cost” I am referring to is not just the new payment.

Client’s situation before buying the new car:

  • 700 credit score – You should target to minimally have a credit score of 680. Ideally 740+.
  • 37% back-end debt-to-income ratio – Back-end ratio is the new house payment plus all current liabilities divided by monthly income. The target is 38% or less for conventional lending.
  • Current car payment is $315 with original balance of $18,016 and current balance of $7,206. This is a great trade line that is helping the credit score.

*Note- Something to remember for each line of credit – Your credit score will climb once you are 50% or less of the original balance or high limit. There is also another tier that will jump the credit score even more at 30% or less.

Client’s situation with the new car:

  • 670 credit score – Now they are below the 680 mark (New credit can cause your credit score to drop 30+)
  • 45% back-end debt-to-income ratio – Now they are above the target 38% or less for conventional lending
  • The new car payment is $634 with new balance of $36,261

This one new credit line has caused their credit score to drop below the minimum target of 680 and caused their back-end ratio to climb above the target 38% or less for conventional lending.

In a scenario like this, even though this may only hurt our ‘good credit’ clients by an additional .25% to .50% to the rate, now you would no longer qualify for the original program that requires less than 38% debt-to-income and 680 credit score. This small rate increase could equate to thousands and thousands of dollars over the life of the loan. Plus, if you were looking for 100% financing then this might even take you out of that option and now you have to put 3% to 5% down.

If that wasn’t bad enough, your home owner’s insurance may be higher since many companies use your credit score to determine which tier put you under.

For the ‘˜less than perfect’ credit, you may see an additional .5% to 1%+ increase in rate or even worse, no longer qualifying for your new home.

No matter what the credit situation is for you, please DO NOT go out and make any major purchases. I would even recommend that you do not make any new purchases on current credit cards. Remember, if you climb over the 50% balance vs. high limit then your score will drop.

This is a lot to absorb and understand so please feel free to contact one of our preferred lenders today to discuss your current financial position and how to best position yourself for the future.

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