Should You Buy a Car or a House First? How to Know

Two of the biggest purchases that impact our daily lives are a car and a house. You know you want both, but what is the best roadmap to acquire these two major milestones? Should you invest in a car or house first?

Car or House First? Consider Your Credit Score and Credit History

In reality, there is no right or wrong answer here. Whether you should purchase a car or house first depends on your own personal circumstances, needs, and lifestyle goals.

However, that does not mean that your purchasing decisions will not impact your eligibility to make the next big move in your life.

Large Purchases on Credit Lines or Loan Accounts Will Affect Your Credit Score

When making large investments like purchasing a house or a car, you’ll be leaving a mark on your credit score.

You’ve probably heard that if you are planning on purchasing a home soon and you’ll be funding it with a mortgage loan, it’s not the best idea to take out any other loans before or during the process. This is because taking out other loans or making large purchases on credit accounts in your name will impact your credit score and credit history.

Making changes to your credit in advance of a home purchase with a mortgage loan is not a good idea because borrowers want to have a stable credit score before they apply to a mortgage lender. Even after you’ve been approved and are in the underwriting stage, you don’t want to do anything that will significantly affect your credit score.

If your credit score suddenly changes, your mortgage lender will have to adjust your borrowing status — and this could negatively impact your eligibility for your home loan.

Similarly, if you’re purchasing a car after buying a home, your credit score may have been impacted by your mortgage loan. Taking out a mortgage increases your debt-to-income ratio, or the balance of debt to income that shapes your financial outlook.

As a result, you may have to pay a higher interest rate on your auto loan — which can make the car more expensive over time.

How to Balance the Impact on Credit

Buyers that are asking whether they should be purchasing a car or house first need to understand that making either of these purchases close together is not necessarily the ideal strategy.

As a best practice, it would be better to prioritize the first purchase based on your immediate needs, and then wait some time before you make the second purchase.

Doing so will give you some time to rebuild your credit by making on-time purchases to your loan and paying off your debts.

Putting time in between the purchases can also help you avoid taking out too many loans at once, which is often viewed as high-risk by lenders.

For example, you may want to purchase a car first. If you put time between the car purchase and when you apply for your mortgage, you’ll be able to make multiple payments on your auto loan to bolster your credit score. Since your mortgage lender will have access to your financial information and payment histories, they will be able to see that you are responsibly taking care of your investments.

Down Payment Considerations

Another best practice would be to save up as much as possible for the down payment of the first purchase to reduce the principal amount being added to your debts.

If you make a large down payment, you’re also likely to access preferable loan terms on your first purchase — which can help save you money on interest and fees over time.

3 Questions to Ask Yourself

To help you decide whether you should move forward with the purchase of a car or house first, consider these three questions:  

#1. What are my lifestyle demands?

Are you in a situation that is pressing you to invest in either a car or house first?

For example, you may need to purchase a home for your family. Or, you may need to purchase a car to provide you with the transportation necessary to commute to work.

When deciding what purchase to make first, prioritize your personal needs.

#2. Do I have access to public transit?

If affordable public transportation options are available to you, you may be able to hold off on purchasing a car and instead purchase a home first. However, this should only be done if it aligns with your overarching needs and circumstances.

#3. What is the current real estate market like?

Is the real estate market in your neighborhood currently advantageous for you? If so, you might want to prioritize a home purchase. If not, it might be wise to opt for a car purchase first.

To help you make the right decision, get in touch with a top real estate professional to discuss your circumstances.