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.
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 be 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 the car.
It happens all the time, sometimes just before you contact a Lender to get pre-qualified for a mortgage.
As part of the interview, you may tell the loan officer your price target.
He will ask about your income, your savings and your debts, then give you his opinion. “If only you didn’t have this car payment,” he 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’s 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, interest, 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….
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 interest rates (approximately 8% on a 30-year fixed-rate loan), you would qualify for approximately $55,000 less 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 guidelines, not yours.
If you haven’t already bought a car, remember one 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.