If you are shopping for a new vehicle and plan to purchase a home in the next few years, you may want to consider how that payment will impact mortgage qualification. The higher your monthly vehicle payment, the less house you can afford. Any debt, including a vehicle loan, will impact your buying power.
Why Do Payment Amounts Matter?
Mortgage lenders and insurers use ratios to set your maximum purchase price. If you have good credit (over 680 beacon score), you can use up to 39% of your gross monthly income on your monthly housing costs. Housing costs include your mortgage payment, heating, property taxes, and 50% of condo fees. Your monthly housing costs plus your debt and other financial commitments must be less than 44% of your gross income. The second ratio is the one that factors in your car payment. If adding your car payment into your monthly debts tips you over 44% of your income, it lowers how much house you can purchase.
Adam makes $70,000 a year. He has a $200/month student loan and a good credit history. Using a 2.99% 5 year mortgage rate he can purchase up to $285,000. We’ve assumed property taxes of $2500 per year, condo fees of $250 per month and heating costs of $50 per month.
If Adam purchases a used truck with a monthly payment of $300, his maximum home purchase is now $280,000. That’s a $5,000 decrease in purchasing power.
If Adam purchases a brand new truck with monthly payments of $600, his maximum home purchase is now $215,000. That’s a $70,000 decrease in purchasing power.
Lenders understand that most people can’t buy a vehicle in cash and the way they calculate your maximum purchase allows for some debt for things like vehicle loans. It only becomes a barrier to purchasing when it is higher than you can afford with the house you want, or if you have a significant amount of other debt.
If you plan to purchase a home and are also considering a vehicle purchase, contact me to determine how it will impact your ability to qualify for a mortgage.