Having a car is a top priority for most and is typically one of the first big purchases an individual will make in their lifetime. However, you may not have considered how having a car loan can have an impact on your borrowing power when it comes to a mortgage.

During your mortgage pre-approval process, your lender will take a look at several things, such as your credit score and debt-to-income ratio.

When it comes to debt, the Government of Canada states that your total debt load shouldn’t be more than 40% of your gross income. This includes your total monthly housing costs plus all of your other debts. This percentage is also known as the total debt service ratio. Debts calculated in this ratio are your monthly housing costs plus all of your other debts including credit card payments, car payments, lines of credit, student loans, child or spousal support, etc. This number is used to calculate if a consumer is carrying a “safe” amount of debt and your car payment adds to this load.

Having a car payment lowers your borrowing power as it reduces the amount of income left to help support your new mortgage. It could be the difference between being approved or falling short in some cases depending on your income and the price of the home you’re looking to purchase.

However a car loan can also be a good thing!

Purchasing a vehicle can have a positive impact on your credit score if you’re diligent in making your payments on time. Having a high credit score can better help you qualify for a mortgage. Generally, if your credit score is 600+ you should satisfy the requirement for your mortgage application if your debt to income ratio is acceptable.

It may be savvy to consider an economical car before buying that nice expensive one as someone who has yet to enter the housing market, but in the end it’s up to you to consider your future finances. Buying a car can have an affect on your home purchasing power, however it doesn’t have to prevent you from buying a home.

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