New house vs. new cars: Which should I buy first?

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Both loans will affect your credit; go with the mortgage first to make sure you qualify

The Credit Guy columnist Todd Ossenfort
Todd Ossenfort has been chief operating officer for Pioneer Credit Counseling since 1998. He writes our weekly “The Credit Guy” column, answering reader questions about credit counseling and debt issues.

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Question

Dear Credit Guy
My credit is in the mid 700s, and my wife and I want to buy a house. We also want to buy new vehicles.

My score will drop with both, so which one do you recommend I buy first? – Heath

Answer

Dear Heath,
Because of the way your question is worded – you “want” to buy a house and new vehicles – I am going to assume that neither of your vehicles is on its last legs and must be replaced in the very near future.

That being said, I would suggest that you look at your home purchase first.

Reasons to buy a home first versus new cars

Buying a home and entering into a mortgage is usually the largest single purchase a person will make in their lifetime.

For that reason, you want to be sure your credit is in its very best shape before you start the process.

While it is true that car loans in good standing can help your credit score, it takes time for that to happen.

You rightly point out that your score will drop when you make either of these purchases.

Video: 5 Tips before buying a house

This is because your score will have to absorb both a hard inquiry and a new account, both of which will ding your score.

It’s hard to put an exact time frame on how long it will take to absorb the hit and see your score bounce back and improve, but it will be several months at the very least.

Also, if you buy your cars first, you will be adding two car loans to your monthly spending. This could signal to lenders that you may be in danger of becoming overextended.

Again, I am assuming that you don’t believe that to be the case, but appearances are important to potential lenders.

Getting ready to apply for a mortgage or car loan

I know you mentioned your credit score, but be sure to look at your credit reports from all three of the reporting agencies – Equifax, Experian and TransUnion – if you have not done so already. You can do this for free at Annualcreditreport.com. You can also check your TransUnion credit report for free anytime at CreditCards.com.

Look over your credit reports and if you find any errors, be sure to report them right away. Your wife should look at her credit reports, too, if her name will be on the mortgage, as her credit reports also will be pulled and examined by the lender.

As you move forward on purchasing a home, here are some things to keep in mind:

  • Pay down your card debt.
    If you have any credit card debt, try to pay down as much as possible, as soon as possible.
  • Don’t close your cards.
    Once you have paid off your card debt, keep your cards open and use them regularly, but only for those purchases you can pay in full when the bill arrives.
  • Keep your credit utilization low.
    Be sure to stay well under your credit limit at all times on your credit cards. The 30 percent rule is a myth. You should keep your credit utilization as low as possible.
  • Pay your bills on time.
    Making payments on all your financial obligations on time, every time is the single most important thing you can do to boost your credit score.

Take care of your credit!

See related: How to boost low score to qualify for a mortgage, Mortgage approved! Time to let your credit score slip?

 

 




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