How Auto Loans Affect Home Loans And Debt To Income Ratios


How Auto Loans Affect Home Loans And Debt To Income Ratios

This BLOG On How Auto Loans Affect Home Loans And Debt To Income Ratios Was UPDATED On July 28th, 2018

Debt to income ratios is one of the most important factors when it comes to mortgage qualification.

  • Debt to income ratios is what determine how much home buyers can afford
  • Debt to income ratios are calculated as adding the sum of all monthly minimum monthly payments divided by the borrower’s monthly gross income
  • Monthly minimum payments includes the following:
    • monthly minimum credit card payments
    • monthly minimum student loan payments
    • monthly installment payments
    • minimum child support payments if applicable
    • minimum alimony payments if applicable
    • minimum auto loan payments
    • any other monthly minimum payments
  • Monthly minimum payments are just a fact of life
  • However, with auto loans, the impact can be huge
  • Auto Loans can really hurt and sky rocket borrower’s debt to income ratios
  • How auto loans affect home loans is that most auto loans are $300 or more per month
  • This type of large monthly payment will have a negative impact on debt to income ratios in qualifying
  • Most newer automobiles are larger ticket items
  • An average new vehicle costs $25,000
  • The longest an auto loan can be amortized over is a 7 year period
  • Unlike a home loan where it can be amortized over a 30 year period
  • A $300 per month auto loan is equivalent to a $60,000 home loan
  • So right off the bat if you have a $300 monthly automobile payment, home buying power will be reduced by $60,000

Home Buyer That Need To Purchase A New Car

Getting auto financing is easy.

  • Most automobile dealerships have relationships with dozens of auto finance companies that offer financing for car buyers with no money down
  • One thing about automobile loans is that the payment terms, also known as amortization schedule, is short
  • For a new car, the maximum a new car buyer can finance their vehicle is 7 year
  • Some new vehicles, such as new SUVs or decked out pick up trucks as well as luxury sedans and fancy sports cars can have price tags of higher than $60,000
  • Even a $25,000 new Honda can yield a monthly payment of $500.00 per month
  • A $500.00 per month car loan payment is equivalent to a $100,000 principal and interest payment on a home loan
  • If you need to purchase a new car and see yourself buying a new home in the near future, it is greatly recommended to delay buying that new car until having closed on the home loan.

How Auto Loans Affect Home Loans When Trading In Your Car

If you currently have a larger car loan payment and do not qualify for a home loan because of the high auto loan payment, you may want to think about trading the car in for another vehicle. See if you can get a lower monthly auto payment. It does not matter how much of the car loan balance is. What matters is the monthly minimum monthly payment when it comes to lenders. Consumers can have a $200,000 Lamborghini and if the payment is $300.00 per month, this is better than having a $20,000 Honda with a monthly payment of $600.00 per month.  Lenders will not take the balance owed but will take the monthly payment of the borrower. If you have a $500.00 per month auto payment and if you can buy a newer car and extend the terms to lower monthly payment, this will be a good idea since it will reduce overall debt to income ratios

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