As the real estate market, the subprime lending crisis and credit crunch continue to drag on the economy, lenders have really started to tighten lending standards. That means you may have easily qualified for a mortgage just a year ago, but even with the same financial situation, you may not be able to obtain a home loan today. This can be a catch 22 for new buyers. It is a buyer's market with plenty of good deals, yet it is hard to qualify for a loan.
How Your Car Loan May Hurt You
While your credit score is one of the most important factors in determining whether or not you will be approved for a loan, when it comes to housing, it is also all about ratios. One of the most common is the debt-to-income ratio. This is simply the ratio of total debt payments you have relative to your income. Lenders like to see at the most, a debt-to-income ratio of 36%. Some lenders today will want to see even less debt.
As an example, let's say you have a gross monthly income of $3,500. To see the how much debt you should stay below in order to qualify for mortgage, multiply $3,500 by 36%. You end up with $1,260. This is the maximum monthly debt payments the lender would like to see. As you know with the price of many new and even used cars today, it only takes one auto loan payment to put a big dent in this amount. If you have a $400/month auto loan, you're left with only $860 each month for a mortgage payment. So, if you carry credit card debt, student loan debt, or any other monthly debt payments, you reduce the available money left for a mortgage even further.
Prioritize
If you're in the market for either a new vehicle or a home, you need to think very carefully about either purchase. If you need a new car now, but don't think you'll be in the market for a house for another year or two, don't get in over your head. That auto loan could come into play when the time comes to qualify for a home loan. If you already have a relatively large car payment and find it difficult to qualify for a mortgage, trading down may be one way unload enough debt to help you qualify. Since lenders are not handing out money as freely as just a year or two ago, it is more important than ever to seriously plan and take your other payments into consideration.
If you have a car loan, student loan, and credit card debt, you may not be able to afford a mortgage payment anyway. I’d much rather be stretch my money to the limit to avoid worrying about whether I’ll be able to make all those monthly debt payments.