What are the biggest loans you’ll take out in your lifetime? If you’re like most people, they’ll be the ones you use to finance the purchase of your home and car.
But aside from the sizable financial commitments that come with these jumbo-size loans, mortgage and auto loans don’t have as much in common as you might think. In fact, you’ll find differences in everything from the credit scores you’ll need to qualify for these loans to the time it takes to close them.
In short? Auto loans are a big deal. But qualifying for and closing a mortgage loan takes more effort and paperwork as well as better credit.
The reason for this is simple: Car loans are big loans. But mortgage loans are even bigger. Lenders take on more risk when lending you the hundreds of thousands of dollars that you’ll likely need to finance the purchase of a new home, so you should expect the application process for a mortgage loan to be far more rigorous.
“Perhaps the biggest difference in the application processes between mortgages and auto loans is the fact that your lender will scrutinize your credit history much more closely whenever you apply for a mortgage,” says Michelle Black, president of Fort Mill, North Carolina-based credit-repair firm HOPE4USA. “Since you will likely be applying to borrow much more money when you take out a mortgage, this, of course, makes sense.”
The Credit Hoops
When you apply for a mortgage loan, your lender will look at all three of your credit reports, which are maintained by the national credit bureaus of Experian, Equifax and TransUnion. Mortgage lenders will scrutinize each of these reports in-depth, looking for any potential warning signs – such as late payments, high credit card debt or past bankruptcies – that could label you as a high risk to default on your monthly mortgage payments.
Black said that when you apply for an auto loan, lenders will still study your credit report. But they will usually look at just one of your three reports, Black said.
“This potentially makes your approval for auto financing much easier,” she explains.
Credit Dings Hurt More
If these reports are filled with credit dings, qualifying for a mortgage loan might be near impossible, according to Black.
For instance, if you filed Chapter 13 bankruptcy, this financial misstep will remain on your credit report for seven years. A chapter 7 bankruptcy will remain on your report for 10. Black said that most mortgage lenders won’t approve you for a mortgage loan if a bankruptcy filing is relatively new. The same can be said of a foreclosure, which will remain on your credit reports for seven years.
But auto lenders, again because they are passing out less money, might be more willing to overlook these financial setbacks.
“These same red flags can make it difficult to qualify for an auto loan and can certainly lead to higher interest rates and less attractive terms,” Black says. “However, they are not necessarily deal killers as they would likely be in the mortgage world.”
Bob Lonergan, vice president of sales enablement with Bozeman, Montana-based Zoot Enterprises, which offers instant credit and loan origination solutions for financial institutions, said that auto lenders are frequently willing to take on greater risks when lending to consumers.
“The auto industry wants to sell more cars,” Lonergan says. “To do this, they’re willing to take on a higher level of risk, so they’re more willing to lend to customers who don’t have perfect credit.”
Realize, though, that while auto lenders might be more willing to loan money to borrowers with credit issues, these credit-challenged borrowers will have to pay higher interest rates. Auto lenders aren’t as risk-aversive as mortgage companies might be, but they’ll still protect themselves financially by charging riskier customers higher rates, according to Lonergan.
“It’s true that it’s easier to qualify for an auto loan than it is for a mortgage,” Lonergan says. “But credit issues will still hurt in some way, no matter what type of loan you are applying for.”
There is one area in which mortgage and auto loans don’t differ: the paperwork you need to prove to lenders that you’re a good bet to repay your loan on time.
Lonergan said that you should expect to come up with plenty of paperwork, whether you’re applying for a mortgage or an auto loan.
For instance, you might need to provide copies of your most recent pay stubs, tax returns and bank account statements when applying for both auto and mortgage loans. You’ll need to provide proof of auto insurance when applying for an auto loan and proof of homeowners insurance when applying for a mortgage.
“There is always paperwork involved,” Lonergan says. “That is changing a bit. But you will still have to provide documents to verify you can afford the loan you are taking out.”
Finally, there’s time. Earning approval for a mortgage loan is far from a quick process. Approval times will vary, but you can expect to wait from 30 to 45 days – sometimes longer – to get full approval for a home loan.
Getting approved for an auto loan is a far quicker process. You can usually receive a loan from the dealer the very day you buy your car, if you have solid credit. It’s often financially smarter, though, to get preapproved for an auto loan from a bank or credit union before heading to the dealer. These lenders will often provide lower rates, and having a loan in hand might also convince dealers to offer you a lower rate on their own financing.
If you plan on making either of these purchases soon, it’s important to check your credit score and touch base with your financial advisor.
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