Q&A: Should You Pay Off Your Car Loan Before Buying a House?

A question I hear from buyers who have been saving for a while: I have enough cash to pay off my car. Should I do that before I apply for a mortgage?

The plain answer is that it depends on what your loan file needs more, and your lender is the one who can tell you. Here is how to think about it before that conversation.

A lender looks at two things this decision touches. The first is your monthly debt compared to your monthly income. A car payment counts as monthly debt, so removing it can make room for a larger housing payment or make an approval more comfortable. The second is your cash. You need money for the down payment and closing costs, and many loans also want to see some left over in the bank afterward.

Paying off the car helps the first number and hurts the second. That is the whole tradeoff.

When paying it off can make sense. If your monthly debts are the tight spot in your file and you have more than enough cash for the down payment, closing costs, and a cushion, clearing the car payment may help.

When it can backfire. If the payoff would leave you thin on cash, you may trade one problem for another. A buyer with a low debt load and no money for closing is not in a stronger position.

Two details worth asking about. First, some loan programs treat a car loan differently when only a few payments remain, so ask whether yours even counts against you. Second, paying off and closing an account can move a credit score, sometimes in a direction people do not expect. Your lender can tell you whether that matters for your file.

The order matters more than the answer. Talk to a lender first and ask them to run your numbers both ways: with the car loan and without it. Then decide. Moving a large sum before that conversation is the most common mistake I see, because the money cannot easily be put back.

And once you are under contract, do not make big financial moves, new loans included, without checking with your lender first.

This is general information, not legal or tax advice. For loan questions, ask your lender.

Search homes across the Phoenix North Valley: https://www.previewarizonahomes.com/?utm_source=blog_pah&utm_medium=marketing&utm_campaign=daily

Jon Hegreness, REALTOR / Associate Broker, Howe Realty
(623) 826-0888 / JonHegreness@gmail.com / License BR540940000
9059 W Lake Pleasant Pkwy, B-200, Peoria, AZ 85382
previewarizonahomes.com