Thinking about buying a car and taking out an auto loan before a mortgage or while you’re in the process of closing a mortgage loan? Think again. Consult your mortgage lender first and see if it can affect your home loan.
Your Credit Report
When you apply for any loan or do something that affects your credit, it will automatically be reflected on your credit report. Lenders study these reports when evaluating your capacity to make good on a mortgage. Know that having multiple loans simultaneously or high debts in your report will be considered a negative by lenders.
Your Debt-to-Income Ratio
Aside from the information in your credit report, a lender will also look into your DTI or debt-to-income ratio, which is the amount you spend monthly for repaying debts. Most lenders will prefer a DTI ratio of 36% or less. So, if an auto loan will increase your DTI to the limit, the mortgage lender Salt Lake City residents highly recommend, for example, won’t approve your mortgage loan.
Your Credit Rating vs. Your Potential Interest Rate
The lender will use the information in your credit report to determine your borrowing capacity. Applying for loans — in this case, a car loan — or getting approved for one may decrease your credit rating. More importantly, lenders use your rating for determining the interest rate for your mortgage. This generally means that a reduced rating due to a car loan can result in higher mortgage rates. In addition, if other loans, credit cards, or other types of debt affect your pre-income tax, lenders will require you to pay off all your debts first, increase your income and your down payment, or get a co-signer before approving your loan application.
Building Credit with Car Loans
Although a car loan will definitely affect your credit rating, if you have bad or limited credit, getting car loan at least six to 12 months prior to getting a mortgage loan can positively affect your credit rating. This is applicable only if you pay your monthly payments on time to increase your credit score.
Manage your car loan well, so you can increase your chances of obtaining a mortgage in the near future.