Mortgage With An Auto Loan And How It Impacts Debt To Income Ratio
This Article Is About Qualifying For A Mortgage With An Auto Loan And How It Impacts Debt To Income Ratio
Borrowers with a higher debt-to-income ratio should try to avoid applying for a mortgage with an auto loan. This holds especially true with buying a new car prior to buying a new home. Every American family needs at least one car. Most brand new vehicles cost over $30,000 per month. The average monthly car payment on a new car is $500 per month. A $500 per month monthly payment is equivalent to a $100,000 mortgage. What this means is if you purchase a brand new car with a $500 monthly car payment prior to buying a new home, your buying power will get reduced by $100,000. Today’s housing prices are skyrocketing. Home has appreciated double digits for the past three years and is continuing to increase. Both HUD and the Federal Housing Finance Agency (FHFA) have increased FHA and Conventional loan limits for the past five years.
There is a major housing shortage throughout the United States. There is more demand for homes than there is an inventory of housing. Combined with the lowest mortgage rates in the history of the U.S. is what is driving home prices to record levels. Many renters are rushing to purchase new homes due to historic low mortgage rates. Mortgage rates are starting to creep up. Inflation is affecting the economy and will most definitely drive home prices higher. We expect home prices to keep on increasing for the next several years. Renters realize that right now is their chance to become homeowners before they get priced out of the housing market.
Qualifying For A Mortgage With An Auto Loan
Many homebuyers make the mistake of buying a new car prior to applying for a mortgage. Buying a new car prior to applying for a mortgage often backfires on the borrower. Especially for borrowers with higher debt to income ratio. The best advice we can give is if you are planning on trading in your car for a new car or buying a new vehicle, wait until you close on your home loan.
You can qualify to purchase a new vehicle after you closed on your home. Auto finance companies do not have strict debt-to-income ratio requirements like mortgage lenders do. The team at Gustan Cho Associates are experts in helping borrowers with high debt-to-income ratios. We can help borrowers with high auto loan payments restructure their debts so they can qualify for a home mortgage. In this article, we will cover and discuss qualifying for a mortgage with an auto loan and high debt to income ratio.
Why Is It Difficult To Qualify For A Mortgage With An Auto Loan
Qualifying for a mortgage with an auto loan is no problem if you have enough income to meet the debt-to-income ratio requirements on the individual loan program. However, qualifying for a mortgage with an auto loan becomes a problem when borrowers already have a high debt to income ratio. It becomes a hurdle for borrowers with high debt to income ratio because due to the auto loan the borrower cannot qualify for a loan that is large enough to purchase the home they want. The debt to income ratio is one of the most important factors mortgage underwriters use to determine a mortgage approval. The debt to income ratio is what determines the borrower’s ability to repay their new mortgage.
The Negative Affect On Monthly Auto Loan Payments
Monthly auto payments are normally large because auto loans are amortized for shorter periods than mortgage loans. Most auto loans are amortized over five to seven years. Mortgage loans are amortized over 30 years. This is why monthly auto loans are averaging over $500 per month. As mentioned earlier, a $500 monthly payment is equivalent to a $100,000 mortgage loan balance. The cost of new autos can range between $30,000 to over $100,000. Some SUVs and pickup trucks surpass $100,000 with all the options. Many folks with families purchase SUVs which are very expensive. This holds especially true for SUVs with four-wheel drive and all the options that are available.
Many households have more than two vehicle payments. If two vehicle payments average $1,000 per month, that means it is equivalent to a $200,000 mortgage loan balance. Many homebuyers face the dilemma of finding themselves short of qualifying for a mortgage loan that is large enough to purchase the home of their dreams due to large auto payments. Again, auto loans may not affect all borrowers. However, it does affect borrowers with high debt-to-income ratios. Homebuyers need to realize how an auto payment can create challenges when qualifying for a mortgage on your new home purchase. A new auto loan can greatly reduce your buying power on a new home.
Advice On Buying A New Car When Buying A Home
Monthly auto payment is inevitable in real life. However, with the high cost of vehicles these days, a high monthly auto payment can substantially increase your debt to income ratio where you can get priced out of the house you are looking to purchase. Mortgage loan programs have a debt to income ratio caps. Lenders do not want to lend to borrowers with high debt-to-income ratios. High debt to income ratios may affect a borrowers’ ability to repay their new home mortgage. Many home buyers want to trade in their older vehicles to brand new vehicles when buying a new house.
New homeowners want brand new furniture and new vehicles. However, homebuyers need to talk to their loan officers before buying any high-ticket items during the homebuying and mortgage process. There are certain circumstances where trading in an old car for a new car can be fine. If the borrower trades in an older car for a new car and the monthly payments are lower, that is fine. Lenders are not concerned with the price of the vehicle. They are only concerned with the monthly payments. The monthly payments are what affect the debt to income ratio.
What If The Borrower Needs To Purchase A New Car Before Closing On Their New Home
There are instances where a homebuyer cannot wait in purchasing a new car. A working car is a necessity for families. There are instances where the old car has completely given up and they need to purchase a new car. Remember that lenders are not concerned with the total price of the vehicle. Their main concern is the monthly payment. The key is to have a car payment with the lowest monthly payment available. Get the longest amortized term available. Many new cars can be amortized for up to seven years. Try to get the lower interest rate available. Lower interest rates and longer amortization will get you the lowest monthly payments.
If you are married and your spouse is not going to be on the loan, see if you can get the new vehicle financed under your spouse’s name. This way it will not affect your debt to income ratio. if your spouse is the main borrower and you are not on the mortgage loan, then try to get the car financed under your name so your spouse’s debt to income ratio is not affected. If you can not have the car financed under the name of the borrower of the mortgage, it will not affect the main borrower’s debt to income ratio on the home purchase.
If The New Auto Loan Affects The Purchasing Power On The New Home Purchase
If you already purchased a new vehicle and have more than one new car loan, it may affect your buying power. The team at Gustan Cho Associates are experts in finding solutions for borrowers with high auto payments and high debt-to-income ratios. You can try to refinance your car loan or trade-in your car to a new car that has lower monthly payments. As mentioned earlier, the amount of the car loan balance does not matter. It is the monthly payments lenders are concerned with when it comes to debt to income ratio calculations.
Married folks should never put both people on a car loan. Only one person should go on a car loan. Lenders will penalize both spouses if both spouses are on the car loan. If only one spouse is the borrower on a home purchase, try to refinance the vehicle by taking out the homebuyer/borrower and put the auto financing on the non-borrowing spouse. Another potential solution is by paying off the car loan with your savings and/or gift from a family member. FHA and Conventional loans allow for non-occupant co-borrowers. You can try to add non-occupant co-borrowers to offset the high debt to income ratio.
Hurdles With Qualifying For A Mortgage With An Auto Loan
Monthly car payments affect the borrower’s debt to income ratio calculations when it comes to qualifying for a mortgage. Car payments are the single largest monthly payment that often affects a homebuyer’s buying power. It is best recommended not to purchase a new vehicle or trade in your car until you have closed on your new home. The best thing to do is for you to wait until you have closed on your home loan before buying a new car. You can purchase a new car the minute you close on your new home. Homebuyers who are running into hurdles due to large monthly car payments, please contact us at Gustan Cho Associates at 800-900-8569. Or text us for a faster response. You can also email us at gcho@gustancho.com. The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.
