Picture this: you’re in the process of buying your dream home. It’s a new build, and you’re already imagining where your furniture will go.
Then life throws you a curveball as it always, inevitably does. A car accident leaves your vehicle totaled, and you find yourself needing a replacement.
Understandably, you begin narrowing down options for a new car. But before you sign on the dotted line for that shiny new ride, let’s take a pause.
As your real estate advisor, let me tell you why this decision could seriously derail your home-buying process.
Why Timing Matters
When you’re under contract to buy a home — especially a new build with a closing date months away — your financial profile becomes a critical piece of the puzzle. Any significant financial move, like buying a car, could cause hiccups in the home-buying process. Here’s why:
1. Large Financial Transactions Raise Red Flags
Your mortgage lender is watching your financial activity closely. If you receive a large insurance payout for your totaled vehicle, you’ll need to provide detailed documentation showing where that money came from. Without this paper trail, your lender could delay or even deny your loan.
2. Debt-to-Income Ratio Adjustments
When you apply for a mortgage, your lender evaluates your debt-to-income (DTI) ratio. Adding a new vehicle loan or lease to the mix can throw off this balance. Even if your car payment stays the same, the total amount of the new debt could be higher, potentially reducing the size of the mortgage you qualify for—or disqualifying you altogether.
3. Expense-to-Income Ratio Impact
A lower loan amount on your new car doesn’t necessarily mean you’re in the clear. If your monthly payment is higher, this could skew your expense-to-income ratio, again affecting your ability to close on the home loan.
4. Credit Score Fluctuations
Shopping for car loans, taking out new credit, or even adjusting your insurance rates can affect your credit score. While some fluctuations may seem minor, even a small dip could impact the interest rate or loan amount you’re eligible for on your mortgage.
5. Strategic Use of Insurance Payouts
If you receive a large payout from your insurance company, you might be tempted to use it all for a down payment on a new car. However, it might make more sense to hold off, purchase a cheaper car outright, and use the remaining funds to boost your down payment on the home. A larger mortgage down payment could lower your monthly payments or help you avoid private mortgage insurance (PMI).
What Should You Do Instead?
Before making any financial decisions while under contract:
- Consult Your Mortgage Lender: Always loop them in on any major financial changes. They can help you evaluate the best course of action to protect your loan eligibility.
- Consider a Temporary Solution: If possible, purchase a budget-friendly car (“beater”) to get you through the interim period until after closing. You can upgrade once the keys to your new home are in hand.
- Stay Local with Your Lender: A local lender is invaluable for answering questions and helping you navigate unique situations like this. They understand the community and can offer personalized advice.
The Bottom Line
When buying a home, your financial stability is under the microscope. While it’s tempting to make big purchases to meet life’s needs, timing is everything. Consult your lender, weigh your options, and, if needed, make temporary sacrifices to ensure you can close on your home without any surprises.
Do you have questions about navigating financial decisions during the home-buying process? I’m here to help, and I can connect you with trusted, local lenders to guide you every step of the way in your home buying journey!