Financing a vehicle a few months before I expect to apply for a mortgage?

Question

My wife and I are planning to buy our first home together sometime around June/July time this year so we're mainly in 'piling up cash' mode and are trying to avoid any unnecessary expenses and especially taking out any new credit.

However, my winter beater truck has decided that it's time for it to retire more or less immediately. Driving my regular "three season" vehicle out here in winter isn't always feasible so I'm now faced with two options:

1) Buy another crap can winter beater truck for cash, reducing the size of the house down payment a little and cross my fingers that I don't have to spend weeks fixing up the new old truck. I can get some money out of the existing truck (old Jeep CJ7, so someone will buy it) but I'll have to at least add a little cash to that. Part of the problem is that despite years of experience I have trouble finding decent but cheap vehicles out here on the West Coast.

2) Get over my cheapness when it comes to utility vehicles and buy something newer (not new, but made in the last decade) and thus hopefully something that would last a few years. This unfortunately would require to borrow some money for the vehicle as paying cash for it would tear too big a hole into the non-emergency savings for us to fill in said hole before home purchase time.

Obviously option (2) would also lead to a temporary hit in my currently decent (750+) credit score so I'm also concerned that by taking this option, we would essentially shoot ourselves in the foot when the mortgage application time comes around. I spoke to our credit union last year and they'd be happy to lend me a lot more on a vehicle loan that I care to take out, so getting the financing shouldn't be an issue. The mortgage would also be with this particular credit union.

Considering the price range of vehicles for option (2) and our income, payments would be easily affordable even on a fairly short term car loan (around the 24 month mark), even with the expected maximum house payment that I'd like to stay under anyway. Mortgage and car payment together would be around or below the 25% take home pay mark.

Given all of the above, is the time between taking out the car loan (most likely in the next 2-4 weeks) and the earliest expected mortgage prequalification date (late May) enough for my credit to recover sufficiently so it's within 5-10 points of the current score, or is option (2) something I should really avoid in this case?

Answer 1

If your debt will all be less than 25% gross (yes, I see you said take home) you are in great shape. I'd get the car and not worry.

The well written mortgage is 20% down, with a housing payment (which of course includes prop tax and insurance, as noted by mhoran, below) under 28% and total debt under 36%. You are well within the limits, not even close. That's great.

Answer 2

Buy a modest vehicle with a manageable payment. Keep the payment low enough ($200-300/month) to keep your DTI (Debt-To-Income) ratio clear. The short-term ding to your credit for new credit should disappear in 3-6 months (your time horizon). Having a mix of credit is part of the credit scoring model, so having an installment loan is not a bad thing. Relax.

Answer 3

Usually, it's not a good idea as it will not only raise your debt to income ratios, but also impact your credit scores.
However, if you have extensive credit history, having owned a home or two for a while (read: 10-20 years), taken out multiple auto loans in the past and paid them satisfactory, your credit score may not take a big hit. Possibly ust 5-10 points or it can be 30-40 points. It really depends on the depth of your credit profile.