Should You Finance a Car Before Buying a House?

In my humble opinion, yes you should finance a car before buying a house. Additionally, you should have made at least eighteen payments on at least one auto loan prior to applying for a mortgage. Here is why.

FICO Score

The most widely used credit score is built by the Fair Issac Corporation (FICO). FICO builds its score on five categories. An auto loan will give your score a boost in three areas: payment history, types of credit used, and length of credit history. These three categories account for sixty percent of your credit score. On the other hand, an auto loan will lower your credit score for 60 days after you obtain it. Any time your credit profile is requested by a lender, your score dips temporarily. Once you are approved for a loan, you score dips because it will appear as if you have new credit with a high balance.

Why Eighteen Payments?

Many experts say that making twelve on-time payments on a car loan will give you the maximum credit score boost that you are going to see. They are somewhat right, but…depending on the loan, you may still have too high a balance to see the largest increase in your credit score. Eighteen payments on a new or used car loan should take you out of any negative equity situation and get your balance in line.

Why Does It Matter?

Boosting your credit score before buying a home is important for several reasons:  loan approval, required down payment, and interest rate are chief among them. Most lenders will only offer a mortgage to the top two credit score tiers. That means that you must have a credit score above 679 if you want a traditional mortgage. Also, your credit score dictates whether you will be required to pay 5, 10, or 20 percent down for your home. Lastly, the interest rate that you will be offered is directly tied to your credit score. Since you may be paying this rate for the next thirty years, you can see how important it is to keep it as low as possible. A difference of a single percentage point can cost you tens of thousands of dollars in total interest over a thirty year mortgage.