Your Student Loans May Not Be Holding You Back From Buying a Home as Much as You Think

If you ask younger adults what debt is most likely to stand between them and buying a home, many would probably point to their student loans.

It’s easy to understand why.

It costs a ton of money to go to college, and many students start their adult lives with a bill they’ll be paying off for years to come. And if you’ve ever been on the paying end of a student loan, it can seem almost impossible to put a dent in the balance even when you’re paying more than the minimum amount each month.

But according to a recent survey of mortgage loan officers, student loans aren’t the type of debt most commonly preventing first-time buyers from qualifying to buy a home.

Nope. The thing more likely to stand between them and buying a home is… their car loan.

When loan officers were asked which type of debt most commonly prevents first-time buyers from qualifying for a mortgage, nearly half (47%) said it was auto loans.

Credit card debt came in second at 27%.

Student loans were a distant third, cited by just 15% of respondents.

Owning a Car Isn’t Always Optional, But…

For many people, owning a car isn’t optional.

There’s a good chance you need one to get to work, run errands, have some fun in between all of the work… and, yes, eventually go look at houses you want to buy.

Obviously, first-time buyers can’t be expected to walk everywhere for several years just to improve their chances of qualifying for a mortgage.

But there can be an enormous difference between buying the transportation you need and buying the most expensive vehicle a dealership says you can afford.

Mortgage lenders pay close attention to a borrower’s debt-to-income ratio, which compares their monthly debt obligations to their income. Even if the borrower earns a steady income, has good credit, and consistently makes every payment on time, a sizable car payment can push that ratio beyond what a lender is comfortable with.

Ironically, being able to “afford” the car payment may make it more difficult to afford the home they want.

Whether You Buy or Lease, Keep Your Future Home in Mind

The biggest issue isn’t necessarily whether you buy or lease a car. From a mortgage lender’s perspective, either one can add a monthly obligation that affects how much you’re able to borrow.

The real problem is that car payments have a way of becoming permanent and tend to increase over time.

People often finance a car for five, six, or even seven years, only to trade it in before paying it off. Or they lease one vehicle and replace it with another when the lease ends. Along the way, they may gradually upgrade to newer and more expensive vehicles because the monthly payment still seems manageable.

If buying a home is something you hope to do within the next few years, it may be worth keeping a reliable car longer, choosing a less expensive model, or buying something modest with cash—assuming doing so won’t drain the money you need for a down payment, closing costs, and emergencies.

Before talking to the finance department at a car dealer, you might want to speak with a mortgage professional about how financing, leasing, paying off, or trading in a vehicle could affect your particular numbers.

A car may be an unavoidable expense. Just remember that how much you choose to spend on it each month could determine whether the next driveway you park in belongs to you.