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.
The desire to spend money.
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."
Debt-to-Income Ratios and Car
Payments
When determining your ability to
qualify for a mortgage, a lender looks at what is
called your "debt-to-income" ratio. 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….
…car payments.
How a New Car Payment Reduces Your
Purchase Price
Suppose you earn $5000 a month
and you have a car payment of $400. At current
interest rates (approximately 8% on a thirty-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. Do
not get discouraged, however. You should still take
the time to get pre-qualified by a lender.
However, if you have not already
bought a car, remember one thing. Whenever the
thought of buying a car enters your mind, think
ahead. Think about buying a home first. Buying a
home is a much more important purchase when
considering your future financial well being.
