Car commercials are so alluring; you know the ones, happy drivers accelerating around the curves with the wind in their hair and not a care in the world. It’s tough to head out to the garage and see your car with the slight ding in the door and stain on that seat.
You want the new car but if you are considering a new home purchase, think twice; just a small amount of recurring debt can make a huge impact on your ability to qualify for a home loan.
Most people are aware that lenders consider income and debt when qualifying a borrower for a home loan. In addition to credit history, demonstrating the ability to pay is a critical component in the qualifying process. But just because you feel you can afford that new car payment does not mean the lender will agree. Lending guidelines use debt-to-income ratios to determine the amount of mortgage a borrower can obtain, and these ratios are more conservative than most people think.
While lending guidelines vary slightly from program to program, most common ratios allow the borrower to use up to 31% of their gross income for their mortgage payment, including taxes and insurance. In addition, lenders want to see no more than 39% of your total gross income for all of your expenses. This includes recurring debts such as your car, credit cards, and installment loans…anything that cannot be quickly changed. A new car or boat payment of $500-600/month can reduce the amount of home loan by $100,000.
What!? A $500 to $600 dollar payment will reduce your qualification by $100,000?? Next time you’re shopping online (for a house or a home) just think… if you’re qualified for the $400,000 house but you like the $500,000 houses you might want to dump that car payment!
When you consider that a home is an appreciating asset V.S. the car, or even a boat, atv’s, or R.V.’s which which are depreciating asset (if you can even call it an asset), you can see the financial benefit of spending as much as you can of your monthly income for your home.
Buying a home is a financial investment in your future. Each mortgage payment not only helps you build equity, but as property values increase, your home is also one of the best appreciating assets you can own.
Yes, that slick sports care is beautiful, but before you drive it off the lot, consider if that $100,000 might be better used for a larger home with a pool.
If you want to find out how much house you can afford and, even develop a plan to get you into a home. To schedule an appointment with me Click Here To Book A 15 Minute Phone Consult