Car loans and mortgages, do they affect one another? When a mortgage lender analyzes your finances to qualify you for a mortgage, they’re looking at all of your debt along with the new proposed mortgage payment. The other debts that they consider outside of your new mortgage payment are debts like minimum credit card payments, car loans, student loans, and any losses from other rental property. They do not look at debts like utility bill payments, car insurance or cell phone bills.
Debt ratios matter
A mortgage lender will approve your loan allowing you to spend a certain percentage of your gross monthly income on your new mortgage payment and your debts.
Let’s see how much more mortgage you could qualify for if you did not have a car loan. Then you can see if paying off a car loan off leaves you with the cash needed to make a down payment and pay the closing costs to purchase a new property.
Or this might be helpful if you’re looking to buy a new car and you’re thinking about how not taking out a big car loan, or buying a car later, might be a good idea. After all, a house is more important than a car.
A typical maximum debt ratio is 43%.
Let’s look at an example of how much mortgage borrowing power your monthly car loan might cost you:
- Let’s assume $10,000 a month in household income.
- Let’s also assume a 30 Year Fixed Rate mortgage at *4.00%, strictly for illustrative purposes. *Click here for disclosures.
- And let’s assume that you have a car loan that is $500 a month.
A $105,000 mortgage amount at 4% on a 30 Year Fixed Rate mortgage = $501.29/month.
You can see that having a $500 monthly car payment would reduce the amount of mortgage that you could qualify for by almost $105,000 in mortgage amount.
Conclusion – car loans and mortgages
This same discussion also applies to paying down credit card debt.
If you delayed purchasing a car, bought a less expensive car, or did not buy a new car at all; you could qualify for quite a bit more mortgage than you would with a higher monthly car payment.
Getting approved for a mortgage for the right amount that you need can be complicated. Contact me to discuss your scenario in detail.