Buy a car or buy a home? That is the question! Not everyone can make both investments at the same time, so figuring out which should come first is often a bit of a big decision. Especially considering that buying a vehicle can affect what happens with your home loan process.
MoneySense Magazine columnist and real estate agent Romana King sat down with us to share her expert opinions on which investment is worth making first, how your credit score comes into the equation and the best ways to figure out that down payment number.
“I don’t see a car as an investment, but more as a lifestyle choice because you don’t always need a car, but you do need a place to live,” says King.
For instance, downtowners can usually rely on their own two feet and public transportation to help get them around town while those living in more suburban areas require a car for their daily travels. Although the choice between buying a home and buying a car comes down to personal preference, King believes the deciding factor is whether or not you see job stability over the next five years. “The transactional costs, which include realtor and lawyer fees, as well as moving costs and land transfer taxes, make buying and selling property expensive over a short-time horizon.”
Your Credit Score
Whether you decide on a house or a car, you’ll need to learn that when it comes to big purchases or leases, customers are often asked for credit score information – and the number that shows up can make or break your ability to seal the deal. The biggest culprit in destroying your score? Late payments!
King explains, “When you are late with your payments, it affects your credit score. If it’s an anomaly, meaning that you’ve made only one or two late payments, it probably won’t impact your credit score much.”
But, and it’s a big but at that, making late payments consistently will result in bad credit. So before you sign on any dotted line, be sure that you’ll have the funds to make proper payments on the time schedule that’s required.
And what does King recommend when asked about whether to finance or lease a car?
“Your credit score measures how responsible you are with your finances,” she says. “Leasing or financing can show your potential lenders that you can be responsible with debt. Making regular payments, then, actually helps build your credit score.”
Your Buying Power
Just like your credit score, your buying power is a huge element of the home purchasing process. And King notes that the most important part of your financials when securing a loan is your debt-to-income ratio. This ratio compares your income and assets, with your current debts.
“If the ratio is high, that means too much of your income goes toward paying off your debts,” King explains. “The higher the ratio the more difficult it is to get a mortgage or any other big loan approved.”
The key is to keep your debt under the threshold lenders use to assess your creditworthiness, which is around 32 per cent. Typically, the lower the ratio the better says King.
Your Down Payment
If you do decide to buy a home, you’ll need to save up a down payment and, depending on your situation, that may be as little as five per cent of a home purchase price or as much as 20 per cent. If your debt-to-income ratio is higher than 32 per cent, lenders might require you to make a larger down payment, says King. By increasing your down payment, you not only increase your equity in the home purchase but also decrease your monthly payments (making it easier for you to financially manage).
“New graduates may run into difficulties, as well,” says King. “Either they haven’t built up a credit history, or they haven’t been employed long enough to be viewed, by lenders, as having a stable employment history.”
At the end of the day buying a home is a huge financial responsibility and banks and other lenders want to make sure that you’ve got the goods to keep up with payments. One way to build up a track record of good credit is to finance or lease a car. Just make sure to make regular, on-time payments so your financial reputation grows to be a positive one!