Qualifying for a home loan is more difficult than qualifying for auto financing. Not only is the average home price and mortgage amount larger than the average auto loan or lease, buying a home requires more strenuous credit analysis. Auto dealers and lenders also have credit standards and an approval process, but generally are more lenient than home-loan underwriters. You likely won't have a problem getting a car loan if you have good credit and cash left after buying your home.
Three Factors Affecting Auto Financing
You've already completed the more difficult of the two tasks if you bought a home before a new car. Every dollar you spend on monthly bills, including auto payments, lowers your purchasing power for a home. However, qualifying for a car loan works a little differently. Your debt-to-income ratio, or the percentage of gross income spent on monthly bills, is less important to auto lenders. Auto financing companies are more concerned with the:
- Down payment or the trade-in value of a used car
- Length of the auto-loan repayment period
- Credit score
Auto Lenders and DTI
In general, the lower your credit score, the lower the DTI allowed. For example, a DTI of 36 percent is considered healthy. It includes your monthly recurring debts, such as mortgage payments, and the proposed new auto loan. Excellent credit may allow you to stretch your DTI to as high as 40 percent, according to Motive Auto Finance. Lenders also include the proposed insurance payment on the new vehicle. Together, the new car payment, monthly insurance rate and other recurring debts should not exceed 50 percent of your gross income, says Auto Credit Express. However, bad-credit lenders are concerned with an additional ratio -- payment-to-income. Lenders prefer a PTI of no more than 15 percent, meaning your car payment and auto insurance may not exceed 15 percent of your monthly pay.
Down Payments and Trade-Ins Lower Your Loan Amount
Your down payment, which may include the trade-in value of an old vehicle, reduces the amount financed and the lender's risk. The more money you can put toward your car purchase, the better the loan terms and payment. A higher down payment also lowers you overall DTI and PTI ratios, making it easier to qualify.
If you spent a large amount of your reserves on buying a home and have little to nothing left for a down payment, you may have a hard time getting a car loan with less-than-stellar credit. You also may have trouble buying a car if your home-loan payments don't allow you to save enough for a healthy down payment of 20 percent. Further, new-car buyers have a harder time accumulating 20 percent due to rising new-car prices, according to Edmunds.com.
Longer Loans Equal Lower Payments
Stretching mortgage payments over 30 years yields the lowest monthly payment. Although auto lenders aren't as generous with car repayment periods, the same principle applies. Paying your car off over a longer period reduces the monthly payment, making it easier to qualify. However, it also increases the interest you pay on the auto loan. In the long run, you pay more for the car with a longer repayment term. Although you potentially can finance a new car for seven to nine years, you should opt for the car and loan that will allow you to pay it off in the shortest period possible, such as two years, recommends CNBC.
Credit Concerns Can Keep Your From Buying
A new mortgage balance and mortgage payments may cause your credit score to fall temporarily. The negative impact on scores varies, but generally diminishes with time as you make house payments. Missed or 30-day late payments have a worse affect on scores and can keep you from financing a car altogether, especially if recently reported. Excellent credit, between 720 and 850, results in the best interest rates and lowest monthly payments, according to myFICO. Although you may get financing with bad credit -- in the 620- to 500-range -- it will cost you significantly more, increasing your interest rate by more than 10 percent and making it much more difficult to qualify.
- Motive Auto Finance: What Debt-to-Income Ratio (DTI) is Acceptable for a Car Loan?
- myFICO: How Much Will Your FICO Score Save You on Your Next Car?
- Auto Credit Express: Budget Basics -- Debt to Income and Payment to Income Ratios
- CNBC: Five Tips to Get the Best Deal On A Car Loan
- Edmunds.com: How Much Should a Car Down Payment Be?