What connection exists between your auto payment and your ability to obtain a mortgage? in fact, a lot.

Understanding where a car payment fits into your financial plan may help determine whether buying a home while paying for a new car is possible.

Gaining Approval For A Mortgage

Before purchasing a brand-new car, consider the potential consequences of the monthly payment if you need to be approved for a mortgage.

Generally, you shouldn't commit more than 35% of your income to monthly expenses (including credit card, car, and mortgage payments).

If your auto payment is too high, you might not be able to obtain a mortgage with a significant enough down payment.

Consider getting a smaller or older car to free up more space for your new home.

How Lenders Determine Your Eligibility for a Mortgage

Your financial status and credit score will determine whether you can get a mortgage approved. Once a loan has been granted, lenders use two simple ratios to determine how much you can borrow.

Monthly gross income about total housing costs

Lenders want to make sure you have enough money to handle the monthly costs associated with owning a property, so they base their decisions on how much your salary is spent on housing each month.

Here's how to calculate the ratio on your own.

Your monthly gross income should be noted, excluding any tax and insurance deductions.

Step 2: Add that many to the first number.

Most lenders will use this amount to calculate your total housing costs, often known as principal, interest, property taxes, homeowners insurance, or PITI. Ratio #2 typically makes this issue moot. Thus some lenders may use a much higher percentage (up to 35%, but most people can't properly contribute this much to housing). Assume your annual household income totals $70,000, or $5,833 per month, for Ratio #1. $5,833 x 28% = $1,633. This amount shouldn't exceed the total of your PITI.

A Second Ratio Is an Income To Debt.

In addition to your home expenses, lenders consider your other monthly loan payments. Your debt-to-income ratio is carefully taken into consideration.

The step to calculating it is as follows:

Step 1: Make a list of every debt payment each month due in more than 11 months, including credit card bills, student loans, installment loans for furniture or other purchases, and car loans.

The Impact of a Car Payment on Your Ability to Get a Mortgage

You would be qualified for a $61,000 (at 6.5% interest) home based on the example above. Recognize the problem?

It's simple. There are very few places left in the nation where you can buy a house for $61,000. As of March 2020, the median sale price, as reported by Zillow, was $248,857. 3 You might not be able to get a higher mortgage because of a high vehicle payment.

The Outcome

Owning new cars is exciting (and enticing), but you should examine the trade-off between new and almost-new and the impact it has on your ability to purchase a home or achieve other financial objectives.

Long-term, buying a home might be the more significant goal of the two, so you might need to reconsider your plans for buying a car.

Compared to a new Nissan Altima, which typically costs $24,398 more, a two-year-old Nissan Altima costs around $10,400, and your monthly payment at 6.3% interest with $1,000 down will be roughly $183. Interest rates for used cars are frequently slightly higher than those for new cars.

How does one qualify for a car loan?

When determining whether to approve you for a car loan, lenders consider your income, credit history, down payment, and trade-in. Although you don't need to have excellent credit to apply, you'll get a better interest rate if you do.

How does leasing a car affect your debt-to-income ratio?

A lease will affect your debt-to-income ratio, much like a car loan. You can determine your debt-to-income ratio by summing up all of your debt payments and dividing them by your gross income. You'll have to buy the automobile, return it and drive away, or start a new lease on a different model, even though lease payments are typically less expensive than loan installments.