new car loan impact on FICO score

[greg_atlanta]

I'm recently debt free and the last time I pulled my FICO score it was 763 (at the time I pulled my score I had $10K of credit card debt). I'm sure my score is a little better now.

I've got the new car bug (thinking about '08 G sedan) but I'm also looking to purchase a house or condo in the next 2-3 years. Will having an outstanding car loan at the time I apply for my mortgage affect my FICO score and possibly raise the interest rate on the mortgage?

I've gotten the advice before of "buy a house, THEN buy a car" but that's not feasible now since I want to have a big down payment for the house (prices have yet to drop significantly in Atlanta area.... still inflated from real estate frenzy). I can keep the old Q running for a year or two but I'd rather retire it as a backup car.

Also, will an outstanding car payment affect the value of the house I can buy? I've heard people say they were told "you can afford a $1800/mo mortgage payment, but since you have a $600/mo car payment I can only approve you for a $1200/mo mortgage payment." Any truth to that?

[Q451990]

I don't think your credit score will drop, but the amount you can borrow will. The lender will look at your total debt-to-income ratio and then determine how much of your income is available for paying monthly payments. I don't know if it's a 1 to 1 ratio or not. $600 for your car may not reduce the amount you can borrow for a house by a full $600 - but I'm not sure. I find that a lot of my clients qualify for far more than they're willing to spend on a house... which is refreshing! Most lenders seem to be working on the "if there's enough $$ left over for Ramen noodles, they'll be fine" ratios... so it may not be an issue anyway.

I think you've said it here before... a car is not an investment. In an ideal world you wouldn't increase the loss by paying interest on a depreciable asset, but that's not practical in the real world in most cases.

I would consider how quickly you could save up to pay cash for the car (or for a lot of the car), and make a smaller downpayment on the house if it was me - just because the increasing value (hopefully) of the real estate can absorb your interest - while the depreciating car will not. You can always pay down your mortgage at a faster rate to eliminate the PMI, if that's your motivation for having a larger downpayment.

Good luck!

Heath

[szh]

Hi, Greg.

The act of buying a car with a loan will trigger a credit check and therefore, this will have a small hit (temporary) on your FICO score. Then, depending on the size and amount of the loan that you do take out, it will also have a small lasting effect on your FICO score till a bit after the loan is paid off - the loan and corresponding monthly payment (never be late!) will have a slight affect.

Yes, the FICO score will have a small impact on the potential interest rate on the mortgage. However, the big question is how much impact. This depends on many factors (your income levels, whether the payment to the car loan is a big part of your monthly income, etc., etc.), so it is tough to quantify the impact. In general, if your FICO score is well above 750 ...nearer the 800 mark ... then you will get the best possible interest rate. And, remember that you can negotiate hard on this!

In most cases, the lenders look at your monthly regular payment as a percentage of your total intake. In the past, the rules were simple: as long as the mortgage payment did not exceed about 28% of your money coming in, and regular monthly payments for all lenders totalled about 35-40% of your intake, they would approve the loan. But, the rates depended on your credit score, so this was effectively factored into the 28% calculation (higher interest meant higher monthly payment, right?).

Then, things got out of hand with the sub-prime market. The limits went up unrealistically and people are now defaulting all over the place.

Today, the old rules probably hold true again ... mostly. It probably varies from lender to lender quite a bit though.

My recommendation would be: if you believe that the house is important to you, and if you believe that the value will appreciate (not entirely clear, since the entire country seems to be in a bit of a downward spiral on prices and it will hit Atlanta soon enough too), then the house is more important than the car!

I'd say: stick with the cheap paid-off (hopefully) car, get the house first (at the right time) and then look at a new car some years down the road. The car loan lenders are also less concerned about the FICO score and have less of a impact on the interest rates (and thus total money out at the end of the loan), etc., than mortgage brokers.

Plus, and this is important, you can get car loans from places that do not do mortgage loans - lots more options - like credit unions! Cheaper rates in the long run.

Hope this helps,

Z

[Nozferatu]

It's very interesting how your situation and mine are quite similar...with the difference that you want a MUCH more expensive car however...anyway.

’m faced with a bit of a dilemma.

Back in 2005, I sold my VW GTI so as to not have any payments. I purchased a used 2001 Ford Focus and paid for it in full. The car is running well but will probably need about $1K of work to keep it maintained and safe (i.e. new shocks, tires, probably a timing belt, etc).

One thing that happened to the car that makes me nervous is when I purchased it, I changed the plugs immediately. Well, the old plugs were so badly worn that a piece of the ceramic end of the plug chipped off and fell into the engine block. Needless to say, I didn’t realize it until the engine fired up again. The noise wasn’t pretty but the piece went out the exhaust port and things cleared up. Now the engine has a bit of a clattering sound when cold. It worries me because I think there was some damage done although I experience no oil burning or power loss or poor fuel mileage.

Anyway, my point is that the car needs some maintenance work. Now…the kicker. My sister needs a car but can’t afford one. So I was thinking I’d give her this car and she can pay me monthly for it interest free…at a lower price than what I’d sell for outside.

The dilemma…I need to get another car. Frankly, I don’t want to get another used car. I'd rather get a new one and keep it for a while. I already made the mistake of selling my GTI (economically speaking) but I don’t regret it. Being payment free is wonderful but obviously my Focus doesn’t have the safety and comfort of a newer car.

What do you guys think? I’ve had the Focus now for about 2.3 years. It has about 60K on it. I bought it for around $6.5K and will give my sister a price of $4K and she can pay me whenever, however monthly.

I’ve been looking at the 2007 Nissan Sentra SER model with CVT transmission…slight better fuel mileage than the Focus even though it’s more powerful and larger. I can get one for $16,995K +T/L…a very good deal considering the INVOICE is like $19K. I guess they want to move these things for the 2008’s.

Insurance I checked is like $60 more per year than the Focus believe it or not.

Any opinions? Suggestions?

SIDE NOTE: Affordability isn't the issue....my wife and I make 6 figs right now BUT WE ARE WAITING to buy a home in the next few months possibly.

Anyway, I'd appreciate input too.