Which should you buy first…. the new car, or the new house?
It’s a scenario we see a lot here at the dealership… someone has an older, high mileage vehicle, but they are hesitant to purchase a new vehicle because they are considering purchasing a new home. The concern is that buy purchasing a new vehicle, they will hurt their chances at securing a mortgage.
This may be true in some situations, especially if you already have several lines of unsecured debt with high balances. But often times, the truth is that a new car purchase has no impact on the situation, and can even help you secure a mortgage loan.
The following from http://http://www.marcandangel.com concerns this situation, but specifically to the point of paying for a vehicle outright:
You really want a new house, so you decide to deal with your old car’s problems and instead purchase a new house first. Now you have zero cash, but you do have a slowly appreciating asset, a beautiful new home. 6 months later your old car completely breaks down and the repair costs are close to the total value of the car. If the car isn’t worth the money, you will have no choice but to finance a new car. You will now be paying interest on an auto loan in addition to paying your monthly mortgage payments. The annual appreciation of your house is counterbalanced by the finance charges you are paying on your car loan… at least for the first couple of years. In the end was it really smarter to purchase the house first?
However, keep in mind that your mortgage qualification is based on your debt to income ratio. If you are close to the limit, financing a new car will impact your ability to obtain a mortgage. If you are well under the limit, it may not. It also depends on who you loan originator is. Some loan comapnies actually prefer you to have a new vehicle, especially one with warrenty available on it. The thought process is that if you have a new vehicle you are making payments on, you and the loan originator can than adjust the mortgage amount to fit into a real world budget. It doesn’t do you or the bank any good if you take a mortgage for the maximum amount possible, and then struggle to meet the payment because of unexpected repair needed on your old car, or if it dies and you now have to make a new car payment you didn’t plan for. If you are looking to finance a new vehicle, and a home 9 to 12 months later, you are probably fine. But if you are looking to purchase a home in the next few months, your best bet is likely to wait until after the closing on the house.
As always, each situation can be different, so make sure you weigh all your options and scenarios before making any major purchase.