Ask an expert: Applying for a mortgage and car loan

Question: If you apply for a mortgage and a car loan at the same time, will this have a negative effect on either one? And will it be bad for your credit score? 

Answer: Applying for a car loan and a mortgage at the same time can sometimes be difficult, but it depends on your circumstances.

If you’re applying for your first mortgage and buying your first car, lenders will be concerned about your ability to take on so much new debt. But if you have a history of managing debt responsibly, and have sufficient income to carry both loans, you should have fewer problems.

Lenders will want to calculate what your debt-to-income ratio (your monthly loan payments divided by your monthly income) would be if you were to carry both loans, and they’ll usually want to ensure that it’s less than 36 percent. If it’s not, and you’re still approved, you may be charged a higher interest rate on one or both of the loans, because the lender may perceive you as having a greater risk of defaulting.

About 10 percent of your credit score is based on new inquiries, and applying for several new credit accounts in a short time may reduce your score. Because credit reporting companies understand that people shop around for the best rate, they treat multiple mortgage and auto loan inquires within 30 days as a single application. However, this applies to inquiries related to one loan, not two. It’s possible, therefore, that applying for both a car loan and a mortgage at the same time could have a negative effect on your credit score and be a yellow flag for lenders when they check your file. Also, it's important to note that FICO scores calculated from older versions of the scoring formula use a "shopping period" of just 14 days, while scores calculated from the newest versions of the scoring formula have a 45 day span for the shopping period. The version of the scoring formula used to calculate your FICO score varies by lender.

One way to reduce any potential impact on your credit score from multiple inquiries is to apply for the mortgage first, because that’s the bigger cost, and after that closes, apply for the car loan. If you do end up being charged a slightly higher rate on the auto loan, it will be less important because it’s for a much smaller amount.

If you’re applying for mortgage refinancing rather than a brand-new home loan, you could solve this problem by considering cash-out refinancing. With this option you may be able to get a better rate and better terms on your mortgage, while also tapping into your equity to get additional money for your car purchase. For example, if you owe $60,000 on a $160,000 house, you could refinance your mortgage for $90,000. The lender would then hand you $30,000 that you could use to pay for your vehicle.

Dan Moore
VP, product management

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