Buying a Car Before Buying a House: Does It Hurt Your Chances of Qualifying?
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 home they qualify for or even eliminate any chance of buying a home 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.
