When an individual’s income starts growing and they manage to set aside some savings, they commonly experience what may be considered an innate instinct of modern civilized mankind.
The desire to spend money.
Since North Americans have a special love affair with the automobile, this becomes a high-priority item on the shopping list. Later, other things will added and one of those will probably be a house. However, by the time home ownership has become more than a distant and hopeful dream, you may have already bought that wonderful car.
As part of the interview, you may tell the loan officer your target price range.
He or she will ask about your income, your savings and your debts, then give you their opinion. “If only you didn’t have this car payment,” they might begin, “you would certainly qualify for a home loan to buy that house.” You see, when determining your ability to qualify for a mortgage, a Lender looks at what is called your “debt-to-income” ratio.
What are debt-to-income ratios?
A debt-to-income ratio is the percentage of your gross monthly income (before taxes) that you spend on debt. This will include your monthly housing costs – including principal interst, taxes, insurance, and homeowner’s association fees, if any. It will also include your monthly consumer debt, including credit cards, student loans, installment debt, and…Car Payments!
How a New Car Payment Reduces Your Purchase Price.
Suppose you earn $5,000 a month and you have a car payment of $400. At current interst rates using 5% interest (which is higher than most loans today but lower than the 20 year average) and $250 a month for taxes on a 30 year fixed rate mortgage, you would qualify for approximately $70,000 less house than if you did not have the car payment. Even if you feel you can afford the car payment, mortgage companies approve your mortgage based on their lending guidelines, not yours.
If you haven’t already bought a car, remember on thing: Think ahead. Think about buying a home first, Buying a home is a much more important purchase when considering your future financial well-being.
If you have already been pre-qualified or pre-approved, do not buy a car, furniture, appliances, or anything else on credit prior to your loan closing as the Lender will take one last look at your credit and such a purchase may stop you from getting your loan on your home.