Why Your Car Payment is Killing Your Chances of Buying a Home

Why Your Car Payment is Killing Your Chances of Buying a Home

  • Lindsay Carroll
  • 03/24/23

Without knowing it, so many people wind up killing their chances of buying a home. The second you step foot onto the car dealership lot, your chances start to decrease, not kidding. The average car payment in America is $717/month. At that rate, you are ABSOLUTELY shooting yourself in the foot when it comes to buying a home - unless you make some kind of crazy income, then you do you, boo. But most of us could use $700/mo towards a lot of house! So, I'm just going to rip the bandaid off. If your car payment is above $300, and you don't make at least $60,000 a year, you're killing your chances of buying a home. Now, let's get into why

When you're applying for a loan, the lender looks at your current income, all your debts and what you plan to spend on a home to find what's known as your "Debt To Income Ratio."

Example 1 | Say you make $60,000.00/yr or $5,000/mo, you have no credit card debt but you do have a $300/mo car payment. You take the $5,000 in income, subtract the $300 a month car payment and have $4,700 left of income. Your lender wants to see your housing debt ratio be under 45% of your income (for most lenders/loan types - there are a couple that can go as high at 50% but it is not the norm). Your total housing expense cannot exceed $2,115.00 - that means your mortgage, insurance, HOA, taxes, etc.  With rates and average home prices where they are right now, this is not an unrealistic mortgage payment.

So the formula would be:

Total monthly income ($5000) - Total monthly debt ($300) = Total Qualifying Income $4,700 * Debt Ratio 45% = Max Payment $2115.00

Example 2 | Now, instead of a $300/mo car payment and no other debt, let's say you have a $700/mo car payment with the same income, plus a $50/mo credit card bill and $125/mo for your student loans (a much more realistic scenario, IMO). You take that same $5,000/mo - $875/mo debt payments = $4,125.00 left for qualifying * 45% = $1,856.25 max payment. This is an over $250/month difference in qualification, which can buy you a TON of house - yes even in today's market. (This isn't to say that you CAN'T buy a house for $1800/mo in our market, just to show the difference in qualification). 

Your lender will run through allllllll the numbers with you when you're ready to apply for a mortgage, but it's better to know this in advance to prepare accordingly. I'm not saying you should go trade your car in tomorrow, but don't go out and buy a brand new car if you want to buy a home soon. If you have bought a brand new car, what I do suggest is to take a look at your priorities and your auto loan. Depending on the interest rate, you might be best off refinancing the loan or having to face the tough realization that your car can be costing you qualifying for a home. But don't lose hope - really dig into the rate that you're paying on that loan, see what the balance is etc.

Did you know that the dealership will charge you a MUCH higher interest rate in most cases than an outside lender, like a credit union? A friend of mine saved over $150 a month by going with her credit union for her auto loan, rather than using the dealership. 

If you can't refinance your auto loan or won't stand to save money by doing so, maybe consider trading in your car for something with a lower payment short term - and definitely hold off on buying a new car - until you close escrow your home. At the end of the day, you have to ask yourself if that payment would be worth risking qualifying when you're ready to buy. If you want a recommendation for a great lender to reach out to, check out the buyer resources tab for my suggested lenders. 

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