Debt To Income Ratios And How Auto Loans Affect Home Loans

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 a mortgage loan borrower 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 include monthly minimum credit card payments, monthly minimum student loan payments, monthly installment payments, monthly minimum child support payments if applicable, monthly minimum alimony payments if applicable, monthly minimum auto loan payments, and any other monthly minimum payments.  Monthly minimum payments are just a fact of life, however, with auto loans, the impact can be huge and can really hurt and sky rocket a mortgage loan borrower’s debt to income ratios.  How auto loans affect home loans is that most auto loans are $300 or more per month and this type of large monthly payment will have a negative impact on debt to income ratios for mortgage loan borrowers.  Most newer automobiles are larger ticket items and 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, your home buyer 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 period, is short. For a new car, the maximum a new car buyer can finance their vehicle is 7 years. 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 that you delay buying that new car until you have closed on your 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 your high auto loan payment, you may want to think about trading your car in for another vehicle and see if you can get a lower monthly auto payment. It does not matter how much of the car loan balance you have, what matters is the monthly minimum monthly payment when it comes to a mortgage lender. You can have a $200,000 Lamborghini and if your payment is $300.00 per month, this is better than having a $20,000 Honda with a monthly payment of $600.00 per month.  Mortgage 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 so you can have a lower monthly payment, this will be a good idea since it will reduce your overall debt to income ratios.


The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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