Two big decisions to make in life: when to buy a car and when to buy a house. Whether you’ve just graduated from college, got a new job or are simply ready to take the next step in your endeavours, it seems that many of our roads lead to this simple yet stressful question.
While all our financial circumstances are different, buying a new car before a house does seem like a reasonable idea. After all, cars are mostly more affordable in comparison, and it’ll sure look good in your driveway once you move into that new house. But beyond the value of vanity, is buying a car before a house a smart idea?
“It is never a good idea to go and apply for new debt prior to purchasing a home without consulting your lender,” wrote Darrell Self of DMD Realty on Zillow.com in response to a similar question. “It does add to your debt to income ratio and may cause a drop in your credit score for a specific period of time. If you can at all wait to purchase until after you have closed on your home that would most likely be the best route. Either way talk to a lender about your specific situation so they can provide the guidance that you need.”
In this article, we will look at some key reasons as to why you shouldn’t buy a car before a house. Then you can take that advice and move toward an appropriate decision.
Houses Appreciate, Cars Depreciate
Houses and cars are both long-term purchases. Generally speaking, houses are seen as an appreciating asset. Cars, on the other hand, lose 11 per cent of the overall value as soon as they leave the dealers. So, in the long run, it can be said that a house is perhaps a better investment. While most working professionals will have both, it’s also good to know that you’ll probably be exchanging a car before buying a second home.
Let’s say you buy a house first – ask yourself, how long will it take you to buy a car outright? Understanding your own financial situation will help guide you in this decision-making process. But what if you buy a car first – how long will it take you to save up for the first down payment, while juggling all the car expenses.
What you want to avoid is having to pay mortgage on your house and interest for your vehicle at the same time for a long duration. The situation that allows your house to appreciate in a way that counterbalances the car loan is probably the best one to make. That depends on your own personal financial condition, of course.
Car First Hurts Credit
Anytime you apply for a new credit account (credit card, car loan, mortgage, etc.) your FICO score could drop. This can hurt your chances of getting a loan when you actually need one. In many cases, getting a car loan is much easier than getting a mortgage. Therefore, if you are financing a car, your application for a mortgage may be rejected, eliminating your chances of buying the house you want.
Before you buy a car be sure to talk to a lender and see how far your score would drop after the loan. If it is below the minimum, it might be a better idea to hold off the car until you are able to build up the score. The best way to raise your score is to pay off all debts and increase your limit on the credit cards you have.
What if I Lease Instead of Finance?
It might seem like leasing a car may be a more feasible option compared to a loan, but that is not the case. An auto lease is a monthly payment and it still affects your debt-to-income ratio. Lenders will look at that and if the lease payments are too high compared to your overall income, you may be disqualified for a mortgage. A good income-to-debt ratio is 2:1. That is for every $1 of debt, you earn $2 in income.
What Do You Need First?
As you can see, many would argue that owning a car before a house is a bad idea. But it comes down to what you need. Say, if you are buying a house near transit, you might not need a car, or at least have convenient opportunity to save up to get one in the future. However, if you have a car for a job or if you work too far to commute via public transportation, a car is an investment that will earn you money in the long run.
While financiers will not always approve, buying a car before a house is a reasonable choice – if you truly need it.
