Debt-to-income Ratios When Buying A Home
The first thing a lender looks at when determining your ability to qualify for a mortgage is called your “debt-to-income” ratio. That is the percentage of your gross monthly income that you spend on long term debt. This includes your mortgage payment, taxes, insurance and HOA fees. I also includes any consumer debt payments such as credit cards, student loans or installment payments. Plus it includes car payments.
Now you’re wondering just how much that new car payment can reduce the purchase price of your new home. Let’s crunch some numbers. Say you earn $5000 per month and have an average car payment of $400 per month. Calculating based off an 8% interest rate that car payment would cut your purchase power on your new home by about $55,000. That makes a considerable difference in the type of home you will be able to purchase.
It does not matter if you feel you can afford both the more expensive home and the car payment. The mortgage companies approve based on their guidelines not yours. You should still take the time to get pre-qualified with a lender.
Getting pre-qualified with a lender is one of
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the first steps in any home purchase. Your should be able to refer you to a good one. Realtors work with lenders on a daily basis and can offer valuable referrals based on past experience with lenders. That experience is invaluable when searching for well qualified professionals.
The lender will crunch the numbers and evaluate your credit to determine what you qualify for and the terms. That car payment will come into play here and affect how much of a home you qualify for.
If you’re thinking of purchasing both a home and a car in the near future, purchase the home first or you may be living in the car.
