Debt-to-Income Ratios and Car Payments

You see, when determining your ability to qualify for a mortgage, a
lender looks at what is called your "debt-to-income" ratio. A
debt-to-income ratio is the percentage of your gross monthly income
(before taxes) that you spend on debt. This will include your monthly
housing costs, including principal, interest, taxes, insurance, and
homeowner’s association fees, if any. It will also include your monthly
consumer debt, including credit cards, student loans, installment debt,
and….

…car payments.

How a New Car Payment Reduces Your Purchase
Price

For example, suppose you earn $5000 a month and you have a car
payment of $400. At current interest rates (approximately 8% on a
thirty-year fixed rate loan), you would qualify for approximately $55,000
less than if you did not have the car payment.

Even if you feel you can afford the car payment, mortgage companies
approve your mortgage based on their guidelines, not yours. Do not get
discouraged, however. You should still take the time to get
pre-qualified by a lender.

However, if you have not already bought a car, remember one thing.
Whenever the thought of buying a car enters your mind, think ahead.
Think about buying a home first. Buying a home is a much more
important purchase when considering your future financial well being.

Do not buy the car. Buy the house first.

copyright 2000 by Terry Light and RealEstate ABC, revised 2002