Car prices continue to soar, with the average price of a new car exceeding $50,000 for the first time last year, and more than one in five Americans making a monthly car payment of $1,000, another record.
If you’re considering financing a new car while also thinking about buying a home, you might want to think again. High car payments can prevent you from qualifying for a mortgage.
“Higher car payments put a direct strain on the residual income available for mortgage payments,” said Anthony O. Kellum, CEO of Kellum Mortgage Co. in Roseville, Michigan.
Borrowers often qualify for lower loan amounts than usual due to large monthly expenses. This may cause applicants to consider less expensive housing or require larger down payments to compensate for reduced capacity.
— Anthony O. Kellam
Kellum Mortgage CEO
Rising car payments are just part of the affordability squeeze that has plagued the U.S. housing market since the pandemic. Home prices have soared to record levels, and the typical age of first-time buyers has risen to a record 40 years.
“You never know which straw will break the camel’s back,” says Robert Bruska, chief economist at FAO Economics. “But high car payments, high home prices, high mortgage rates, and high student loan levels are all intertwined.”
In other words, it is not an easy environment to buy a house. Loading up on a high car payment before applying for a mortgage can make the process even more difficult.
“I feel overwhelmed.”
The average price of a new car exceeded $50,000 for the first time in September 2025, driven by the popularity of higher quality, longer-lasting cars and electric vehicles, according to Kelley Blue Book.
The average new car payment for loans originated in the fourth quarter of 2025 was $772, according to Edmunds. Additionally, the percentage of new car buyers with monthly payments of $1,000 or more was 20.3%, an increase from 18.9% in the same period last year, and a record high.
Taylor Walker recently purchased a Jeep Wrangler Safari, making her one of the growing share of Americans with monthly car payments of more than $1,000. While the new Jeep included rebates and other incentives, she was flipped on her previous car, a reality that drove up her loan amount.
She currently pays $1,197 per month for the car. “I feel kind of overwhelmed,” Walker said.
As prices rise, car buyers increasingly take out long-term loans. The average term for new loans is now 70 months, or nearly six years, Edmunds said. A generation ago, three- or four-year car loans were common.
“If you look at a consumer’s profile, you’ll see they have car payments of $900, $1,000, $1,200,” says Craig Liddell, executive vice president of LoanLogics, a company that services mortgage lenders. “What has changed is the combination of debt length and payment amounts.”
The good news in Walker’s case is that her high car payment hasn’t affected her ability to become a homeowner because she and her husband bought a home in Northern Virginia before taking out a car loan. But high car payments can cause people to put off repairs and upgrades.
Still, some young people continue to live in rented homes because they believe their car debt will be excluded from the mortgage.
They think, “This car loan is too much of a hassle.” I’m not ready yet because of this albatross. ”
— Craig Riddell
Executive Vice President, Loan Logics, Inc.
How your car payment affects your mortgage application
Underwriting guidelines vary by lender and loan program, but here’s an example of how a high car payment can impact your ability to qualify for a mortgage.
Let’s say you make $8,000 a month and are applying for a $350,000 mortgage at 6.25%. Your monthly principal and interest payments would be $2,155, or 27% of your income. it’s okay. The home debt ratio of 28% is below the 36% total debt-to-income (DTI) limit that many lenders impose on conventional loans.
However, if you add in your $1,200 car payment and $250 student loan payment, your DTI rises to 45%. Conventional loans often allow up to 45% DTI for borrowers with excellent credit, but your unique profile, such as your credit score and the value of your property compared to the size of your loan, may disqualify you or require you to accept a loan of a lower amount.
Federal Housing Administration (FHA) loans may be available. FHA has higher DTI limits, but FHA mortgages also come with higher fees. But just because you’re still eligible doesn’t necessarily mean you should. Consider whether your budget can support the loan and don’t just take a mortgage lender’s word for it that you can buy a house like this.
Mortgage interest rates may vary from lender to lender. So while high car payments can make it harder to qualify for a mortgage, it’s important to compare mortgage lenders and get at least three mortgage offers.
Another approach: “Debt is slavery.”
As more Americans shoulder high car payments, Utah electrician Stephen Hyatt went in the opposite direction and paid off his car loan fully before buying a home. Hyatt and his wife purchased a condo near Salt Lake City in 2025.
“Debt is slavery,” Hyatt says. “Being debt free is freedom.”
Hyatt said he subscribes to the philosophy that mortgages are generally “good debt,” but wanted to limit monthly payments to $1,900.
Ben Clark, a real estate agent who owns Home Buyer Representation in Salt Lake City and is president of the National Association of Exclusive Buyers and Agents, said not having a car payment helped Hyatt increase its buying power.
“For every $100 you reduce your debt, your purchasing power increases by about $17,000 at a rate of 5.875%,” Clark says. “So $1,000 less in debt could mean the difference between a larger home, a home in a better neighborhood, a home in better condition, or just being more financially comfortable.”
Thomas Nitsche, vice president of money management international, which provides credit counseling services, also supports Hyatt’s approach. Too many car buyers are “financing at the top of their budget, or financing the maximum amount approved by their lender with longer, more expensive terms, rather than the lowest amount they can borrow for reliable transportation,” he says. “Minimizing this expense can make a huge difference to your budget, and future homeowners should consider reducing or eliminating their car payments to absorb the ‘hidden’ costs of housing and adapt to the new normal of homeownership.” ”
What you can do to manage your car debt while applying for a mortgage
If you want to apply for a mortgage in the near future, there are a few things to keep in mind when buying a car.
- How much car do I need? Millions of Americans own a car, but can they get by with a lower-than-average monthly payment? If you work in construction, you probably need a truck, but new pickups are expensive. If you’re in a sales job transporting customers, you need something that looks professional and good. But if you work from home or your car sits in an office parking lot all day, a cheaper used car may make more sense than an expensive new car. Edmunds reports that the average payment on a used car loan in the fourth quarter of last year was $554. That’s $200 extra in your mortgage budget.
- Also consider other costs associated with the vehicle. Your car budget doesn’t end with your car payment. You also have to pay for car insurance, repairs, and maintenance. Some apartment complexes charge a parking fee. Or you may need to pay for parking at your place of work.
- “Let’s buy a house before we buy toys.” This is the advice of Ken Johnson, a finance professor at the University of Mississippi. When Johnson worked as a real estate broker, he saw potential buyers who had so much debt on their cars and boats that they couldn’t qualify for a mortgage. “Short-term debt, like a car loan payment, can crush your ability to buy a home,” Johnson says. “Let’s buy a house before we buy toys.”
- Increase your credit score. DTI is another place where your credit score is very important. If your credit score is uneven, your total debt ratio will be limited to 36%. But with a good credit score, that range can reach as high as 45%. “Increasing car payments will have a disparate impact on borrowers with poor credit,” said Bob Smith, co-CEO of GetWYZ Mortgage. “The reason is that a combination of a low credit score and a high debt-to-income ratio is likely to limit your credit. If you have a high credit score, you should enjoy some flexibility with DTI, which has most automated underwriting systems.”