How Rising Car Prices Present One More Hurdle For Homebuyers

Car prices keep soaring — the average price of a new vehicle topped $50,000 for the first time last year, and the share of Americans taking on $1,000 monthly car payments passed 1 in 5, also a record.

If you’re considering a new car loan while also hoping to buy a home, you might want to think again: A hefty car payment can hinder your ability to qualify for a mortgage.

“Higher car payments eat directly into the residual income available for a mortgage payment,” says Anthony O. Kellum, CEO of Kellum Mortgage in Roseville, Michigan.

We see this often where a borrower qualifies for a lower loan amount than they otherwise could because of that significant monthly outgoing expense. It forces applicants to look at lower-priced homes or require larger down payments to compensate for the reduced capacity.

— Anthony O. Kellum
CEO, Kellum Mortgage

Ever-rising car payments are just part of the affordability squeeze that has gripped 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 40, a record.

“You never know which straw will break the camel’s back,” says Robert Brusca, chief economist at FAO Economics. “But it’s all in the mix — high car payments, high house prices, higher mortgage rates, high student debt levels.”

In other words, it’s not an easy environment in which to buy a home. Saddling yourself with a hefty car payment ahead of applying for a mortgage could make your process even more difficult.

‘It feels overwhelming’

The average price of a new car topped $50,000 for the first time in September 2025, according to Kelley Blue Book, driven by better quality, longer-lasting cars as well as the popularity of electric vehicles.

According to Edmunds, the average new car payment for loans originated in the fourth quarter of 2025 was $772. And the share of new-car buyers committing to monthly payments of $1,000 or more reached a record high of 20.3%, up from 18.9% a year earlier.

Taylor Walker recently bought a Jeep Wrangler Safari and became one of the growing share of Americans with a monthly car payment north of $1,000. While the new Jeep included rebates and other incentives, she was upside down on her previous vehicle, a reality that boosted the size of her loan.

She now pays $1,197 a month for her car. “It feels kind of overwhelming,” Walker says. 

As prices have risen, car buyers have taken on longer and longer loans. The average term of a new loan is now 70 months, or nearly six years, according to Edmunds. A generation ago, three- and four-year car loans were the norm. 

“You look at a consumer profile, and you see $900, $1,000, $1,200 auto payments,” says Craig Riddell, executive vice president at LoanLogics, a company that provides services to mortgage lenders. “It’s that combination of the length of the debt and the amount of the payment that has changed.”

The good news in Walker’s case is that she and her husband bought their home in northern Virginia before taking the car loan, so the hefty car payment isn’t affecting their ability to become homeowners. But a hefty car payment could lead folks to put off repairs and renovations.

Still, in some cases, young adults remain renters in part because they think their auto debt will disqualify them from a mortgage.

They think, ‘This automobile loan is just too onerous. I’m not ready yet because I have this albatross.’”

— Craig Riddell
Executive vice president, LoanLogics

How a car payment affects your mortgage application

Underwriting guidelines vary by lender and loan program, but here’s an example of how a large car payment can affect your ability to qualify for a mortgage.

Say you make $8,000 a month and you’re applying for a $350,000 mortgage at 6.25%. Your monthly principal and interest would be $2,155, or 27% of your income. All good — you’re below the 28% housing debt ratio and the 36% total debt-to-income (DTI) limit many lenders impose on conventional loans.

But add in car payment of $1,200 and a $250 student loan payment, and your DTI climbs to 45%. While conventional loans often allow borrowers with stellar credit to go up to 45% DTI, your unique profile — credit score, the value of a property compared to the size of the loan, etc. — might mean you’re no longer eligible, or you may have to accept a smaller loan amount.

You might still be eligible for a Federal Housing Administration (FHA) loan — they have higher DTI limits, but FHA mortgages also come with higher fees. But just because you could still qualify doesn’t necessarily mean you should. Consider whether your budget can support that loan and don’t just take the word of the mortgage lender when it comes to “this is how much home you can afford.”

Mortgage rates can vary from one lender to the next. Therefore, even though a high car payment can increase the level of difficulty when it comes to qualifying for a mortgage, it’s important to compare mortgage lenders and get at least three home loan offers.

An alternate approach: ‘Debt is slavery’

While more and more Americans are taking on hefty auto payments, Utah electrician Stephen Hiatt went in the opposite direction: He paid off his auto loan well before shopping for a home. Hiatt and his wife bought a condo near Salt Lake City in 2025.

“Debt is slavery,” Hiatt says. “Being debt-free is freedom.”

Hiatt says he subscribes to the philosophy that mortgages are generally “good debt,” but he did want to limit his monthly payment to $1,900.

The lack of a car payment helped boost Hiatt’s buying power, says his real estate agent, Ben Clark, owner of Home Buyer Representation Inc. in Salt Lake City and president of the National Association of Exclusive Buyer Agents.

“Every $100 less in debt would increase purchasing power by about $17,000 at a 5.875% rate,” Clark says. “So $1,000 less debt could mean the difference between a larger home, a home in a better area, a home in better condition or just being more comfortable financially.”

Thomas Nitzsche, vice president at credit counseling service Money Management International, endorses Hiatt’s approach. Too many car buyers “take out loans at the top of their budget or finance the maximum approved by the lender for longer, more expensive terms, instead of the least they can possibly borrow to achieve reliable transportation,” he says. “It can be a budget game-changer to minimize this expense, and prospective homeowners should consider reducing or eliminating auto payments to absorb the ‘hidden’ costs of a home and adjust to the new normal of homeownership.”

What you can do to manage auto debt alongside a mortgage application

If you hope to apply for a mortgage in the near future, some things to keep in mind while car shopping: 

• How much car do you need? Millions of Americans own cars, but can you make do with a smaller-than-average monthly payment? If you work in construction, you probably need a truck, and new pickups are expensive. If you work in a sales job that involves ferrying your clients, you want something professional and presentable. But if you work from home, or if your car sits in your office parking lot all day, maybe a cheap used car makes more sense than an expensive new one. The average used car loan payment was $554 in the fourth quarter of last year, Edmunds reports — that’s an extra $200 of leeway in your mortgage budget.
• Consider the other costs associated with the vehicle. The car payment isn’t the end of your auto budget. You also have to pay for auto insurance, repairs and maintenance. Some apartment complexes charge for parking or you may need to pay for parking at your job
• “Buy the home before you buy the toys.” That’s the advice from Ken Johnson, a finance professor at the University of Mississippi. When Johnson worked as a real estate broker, he saw would-be buyers who had amassed so much debt on cars or boats that they couldn’t qualify for mortgages. “Short-term debt, like car loan payments, crushes the ability to buy a home,” Johnson says. “Buy the home before you buy the toys.”
• Boost that credit score. DTIs are another place where credit scores really matter. With a spotty credit score, your total debt ratio is limited to 36%. But with a stellar credit score, that range goes as high as 45%. “Higher auto payments will have a disparate impact on lower credit worthy borrowers,” says Bob Smith, co-CEO of GetWYZ Mortgage. “The reason for this is that the combination of low credit scores and high debt-to-income ratios will likely restrict credit. Higher credit scores should enjoy some flexibility in the DTI with most of the automated underwriting systems.”