What do cars and mortgages have to do with each other? Let us explain further: When a borrower qualifies for a mortgage, the debts reported on their credit report ultimately affect how much they will be able to qualify for.
One financial obligation that most borrowers have is a car loan. Given that most Californians have a love for automobiles, there is a likelihood that the car payment will reflect just how much they love them and has the potential of eating away a large amount of a borrower’s purchasing power.
Most of us need a car to survive, so not having a car for the sake of buying a home is not a realistic option. That being said, there are a few ways you can keep your car from ruining your ability to qualify for the home you want.
One way is to purchase the car in cash or pay off your existing car loan. No car loan means there is no car payment to include into the borrower’s debt-to-income ratio, or DTI, and in turn helps maximize their home purchasing power. Gas and car maintenance are not included in any borrower’s DTI (although the borrower should budget it independently), so they are increasing their qualifying power by not having that debt. If the car loan has 10 months of payments or less remaining, the mortgage lender will, in some cases, omit it from the debt-to-income ratio.
You may be wondering, “that’s nice but I have a lease, not a loan”. If that is the case, the lease payment will have to be included in the borrower’s DTI.
“What if my lease has less than 10 months left on it?” Good question. Leases are handled differently than car loans so even if you have 10 months or less left on your lease, the payment will still be included in your DTI. Reason being, when the lease is up, the borrower will need to sign a new lease or buy a new car. Unfortunately, promising your loan officer that you promise not to buy a new car after your current lease ends is not enough to have underwriting omit the payment.
As an important reminder, be sure NOT to purchase or lease a new car while you are in the process of applying for a home loan. The mortgage lender will be able to see that you had your credit ran and that a new debt was incurred. By doing this you risk pushing your debt-to-income ratio too high which could ultimately disqualify you from the mortgage.
It is important to discuss with your loan officer before you make any big purchases during the application and underwriting process.
If you have any questions regarding car loans (or any other loans/financial obligations) and how they affect your ability to qualify for a mortgage, give us a call at 760-930-0569.