How Are Mortgage and Auto Loans Similar? We get asked this a lot at Rate Marketplace, but the truth is:
They’re quite different.
Getting a loan for a home, car, or education is a big deal. But not all loans are equal, and mortgages are among the most stringent. For many people, getting a loan for a car is their first experience, so the complexity of the mortgage application process may surprise them.
Why Mortgage and Auto Loans Aren’t Similar
Maybe you’re thinking about buying a house but want to know how different loans compare before applying for a mortgage. We’ll discuss several loans and why qualifying for a mortgage is more difficult.
Buying a Vehicle
A car purchase may seem expensive, and it is, but compared to a mortgage, it is a bargain. But that doesn’t mean anyone can get an auto loan. Buying a car vs. getting a mortgage:
- Credit Reports and History – Your credit report will be carefully examined to determine your eligibility. For a car loan, lenders may only look at one of the three major credit reports (Experian, Equifax, and TransUnion), whereas mortgage lenders tend to scrutinize all three. Credit blemishes make it difficult to get a mortgage, but not necessarily a car loan.
- Risk Tolerance – A lender’s risk tolerance varies between an auto loan and a home loan. Even though the car industry is less risk-averse than other industries, it still protects itself by charging those with less credit a higher interest rate.
- Timeline – A test drive to signing the title is a fairly quick process (if you consider sitting in a dealership for several hours ‘quick’). A mortgage loan, on the other hand, can take a month or more to get approved. Not to mention the repayment schedule – a 3-, 5-, or 7-year auto loan versus a 15- or 30-year fixed-rate mortgage.
The Mortgage Application Process
Perceived by many as more difficult than applying for other types of loans, obtaining a mortgage has become increasingly difficult since the 2007-2008 housing crisis.
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- Credit History – Good credit is required to get a mortgage. And a good credit score means a good interest rate and loan terms. Applicants must also show two years of consistent income, which may be difficult for business owners, freelancers, and those just starting out.
- Debt-to-Income Ratio – To determine your percentage of debt, your lender will compare your monthly debts to your monthly income sources. This ratio helps lenders assess your financial strength and keeps you from overspending. A debt-to-income ratio of 43 percent or less is usually required to qualify for a mortgage.
- Assets – A lender will want to see your assets (especially liquid ones) to assess your ability to pay a down payment and monthly mortgage payments. Also, to qualify for a mortgage, you must have reserves built up for a certain number of months.
These detailed lending requirements protect both you as a homebuyer and your lender. In order to lend money to other borrowers, lenders must be able to underwrite and sell your loan. Contact a mortgage banker when you’re ready to take the next step.