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Buying a Car Before Buying a House: Does It Hurt Your Approval Chances?

A person holding paper cutouts of a car and a house
The Bottom Line

Each additional $100 in a car payment can diminish home buying power by $14,000.

Buying a car is fun. But doing it before buying a house could be a mistake.

The main problem with cars is that they are usually financed. And that monthly payment adds to your debt-to-income, or DTI, ratio.

Most homebuyers today already struggle to meet DTI requirements, thanks to elevated home prices and interest rates. Add a car payment, and a buyer may not qualify for a home at all, especially one that suits their needs.

How Does a Car Loan Affect Home Buying Power?

We wanted to find out exactly how much a car payment reduces buying power, so we ran the numbers.

It turns out that each additional $100 in car payment reduces home buying power by about $14,000 following our assumptions.

The average new car payment was $737 and $520 for a used car in the third quarter of 2024, says credit bureau Experian. That means the payment on a new car payment could diminish buying power by about $100,000.

In tangible terms, a recent car buyer may need to look for a two-bedroom condo instead of a three-bedroom home.

Of course, these numbers are just estimates. Those with high incomes may be able to absorb a large car payment without affecting their DTI.

But if a buyer is struggling to qualify for a home (which most are), a car loan could reduce the size of the home they qualify for or even eliminate any chance of buying one for the foreseeable future.

Let’s dig into some numbers.

The Numbers

A homebuyer may qualify with a debt-to-income ratio up to 50% or even higher in some cases. To be safe, we assumed a 45% total DTI including the car loan, all other debt, and the future housing payment.

A car payment can dominate an enormous amount of the DTI allowance. Here’s how a car payment diminishes homebuying power.

How Car Payments Reduce Maximum Home Payments and Prices

Car Payment Max Home Payment Max Home Price
$200 $3,000 $370,000
$300 $3,000 $370,000
$400 $3,000 $370,000
$500 $2,950 $361,000
$600 $2,850 $347,000
$700 $2,750 $333,000
$800 $2,650 $318,000
$900 $2,550 $304,000
$1,000 $2,450 $290,000
$1,100 $2,350 $275,000
$1,200 $2,250 $261,000
$1,300 $2,150 $246,000
$1,400 $2,050 $232,000
$1,500 $1,950 $218,000
$1,600 $1,850 $204,000
$1,700 $1,750 $189,000

Assumes $100k/yr gross income, FHA loan, 3.5% down, 7% example rate, $300/mo non-auto, non-housing debt, 36% front and 45% back ratios, $300/mo property taxes, $125/mo insurance, no HOA. All figures are for example purposes only.

The Massive Amount of Wealth Lost

Someone who buys a very expensive car before buying a house—say with a $1,100, $1,200, or even higher payment—could be in a predicament for years to come.

Auto loans are typically five to seven years. A lender must count the payment toward the borrower’s DTI until the loan is paid off.

Without a serious bump in income, a major car purchase could eliminate the possibility of buying a house for at least five years.

At a modest 3% appreciation rate, a $300,000 home would yield $48,000 in added value over five years. Meanwhile, a $70,000 vehicle is worth just $31,500 after five years, says Kelly Blue Book.

The vehicle resulted in lost wealth of about $86,000 including lost home appreciation and car depreciation. Plus, the buyer now has to deal with elevated home prices compared to five years prior.

It’s very hard to make an argument that anyone should buy an expensive car — or even a new car of any kind — before becoming a homeowner.

Alternatives To Buying an Expensive Vehicle.

Just because cars are detrimental to homebuying doesn’t mean people don’t need them.

Luckily, there are plenty of alternatives to buying a new car off the lot.

  • Pay cash for older cars for sale on Craigslist and Facebook Marketplace.

  • Put money aside each month so you can pay cash in the future.

  • Repair and detail an existing car instead of replacing it.

  • Ask family members and friends to buy a spare car they don’t use.

  • Take out a small loan that you can pay off in a year

None of these options are particularly exciting. Most of the time it comes down to the prospective homebuyer lowering their expectations and being satisfied with a vehicle that won’t impress anyone.

Paying Cash Can Be Dangerous, But Probably Better

Paying cash for a car diminishes the funds you need for a down payment, closing costs, and emergency funds.

But there are low-down-payment loans that can help you reduce the cash you need upfront.

All things considered, it’s better to be low on cash than have high debt payments when buying a house.

Buying a Car Before Buying a House: Is It Worth It?

The decision to buy a car comes down to priorities. If becoming a homeowner is your top goal in the next five years, think twice about financing a car.

If a new car is more important than buying a home, that’s okay, too. But car buyers should realize it’s hard to accomplish both goals at once.

Article Sources

MortgageResearch.com often links to authoritative websites to verify facts and claims made in our articles. Read our editorial standards for more about our mission to deliver accurate and impartial content.
About The Author:

Tim Lucas began his mortgage career in 2001 at Washington Mutual, reviewing wholesale loan files submitted by mortgage brokers. In the mid-2000s, he transitioned to retail lending at M&T Bank as a Mortgage Loan Processor, working with a wide range of borrowers: first-time buyers, investors using now-notorious "option ARMs" and jumbo buyers financing $1–5 million homes.

Tim later launched his own loan processing company while originating loans for his own clients, mainly FHA and USDA loans for first-time buyers. When the 2008 housing crash hit, he pivoted to assisting a prominent Loan Officer at Seattle Mortgage and Golf Savings Bank. He eventually became a Mortgage Processing Supervisor at Mortgage Advisory Group. There, he earned a reputation as a solutions-oriented processor, known for solving complex loan scenarios and uncovering obscure guidelines to help clients get approved.

In 2013, after more than a decade in lending, Tim moved into mortgage education—creating trusted content for sites like MyMortgageInsider.com and TheMortgageReports.com. Today, he blends 10+ years of hands-on mortgage experience with another decade in consumer education at Three Creeks Media, where he leads MortgageResearch.com. Tim is also a licensed Loan Originator (NMLS #118763).

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