How Auto Loans Affect Home Loans And Debt To Income Ratios
This Article Is About How Auto Loans Affect Home Loans And Debt To Income Ratios
Debt to income ratios is one of the most important factors when it comes to mortgage qualification. Debt to income ratios is what determines how much home buyers can afford. Debt to income ratios is calculated as adding the sum of all monthly minimum monthly payments divided by the borrower’s monthly gross income. One of the major hurdles homebuyers with higher debt to income ratios have been having high car payments. The average car payment on a new vehicle is $500 per month. A $500 monthly car payment is equivalent to a $100,000 mortgage loan balance. Homebuyers looking to purchase a new home and need to buy a new vehicle, it is strongly recommended they wait until they close on their new home loan. In this article, we will discuss and cover how auto loans affect home loans.
Monthly Debt Payments In DTI Calculations
Monthly minimum payments include 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 skyrocket 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 Needs 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, are 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 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 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