Customer question and answer time again. This time a question we can’t remember having seen before so is an excellent candidate for a blog topic. The question was ‘Will I still be able to qualify for a mortgage while paying a car loan?’
We asked our Smithville car loans team to explain the situation and whether having a car loan would impact a mortgage application.
Mortgage while Paying a Car Loan
For the majority of Canadians, our cars and our homes are the two largest financial purchases we are likely to make. They are also the two purchases we’re most likely to borrow money to buy.
So, will one impact the other?
Yes, they do, but not necessarily in a bad way.
Debt to income ratio
One way having a car loan will impact any future mortgage lending decision is by your debt to income ratio. The ratio is all your monthly debt payments divided by your monthly income
For example, you pay $1000 a month on rent or mortgage, $400 on your car loan and $100 on credit cards, which totals $1500.
You earn $4,500 per month, so divide that by the $1500 to give you 33%.
If you look purely at the numbers, with all your debt paid each month, you still have $3,000 per month left over for everything else. Which sounds good.
But debt to income is a ratio and lenders much prefer you to be under 35% for car loans and under 45% for mortgages. Using a ratio, even having a lot of money left over each month, you’re still close to the upper limit of borrowing.
Depending how much debt you have and how much income and outgoings you have, a car loan can increase your debt to income ratio, which may need to be overcome for a mortgage application.
As you’re paying a car loan, you’ll also have a payment history. Unlike your debt to income ratio, your payment history works for you.
Any application for credit will include a hard inquiry of your credit report to check how you handle debt. As long as you’re making car payments and haven’t missed any, the mortgage lenders should see a long list of on-time payments and a decent credit score as a result.
As long as nothing else has happened, this definitely works for you. Your payment history makes up 35% of your credit score, so you should have a decent score.
Payment history is also very influential in lending decisions. Pay on time, all the time and you stand a much higher chance of qualifying for a loan.
Finally, having a car loan will feature into affordability calculations for your mortgage. That means your monthly payment will be subtracted from your income in the same way groceries, bills, credit cards and other outgoings will be subtracted.
This would use the same calculations we did for debt to income, but use cash amounts rather than percentages.
You can still qualify for a mortgage while paying a car loan but it will factor into affordability calculations. As long as you can comfortably afford both, it shouldn’t stop you getting what you want!
For those of you who know that you have a challenging credit situation, please visit Dixie Auto Loans where we have a team of credit specialists ready to help you get approved for a car loan today!
For any questions or concerns, please don’t hesitate to contact us here!