The typical new car loan costs $648 per month, while the average new lease costs $522 per month, according to an Experian report from the first quarter of 2022.
Since mortgage lenders compare your monthly payments to your income to see how much house you can afford, monthly car payments will affect your mortgage eligibility.
But auto loans and auto leases are not viewed as the same by mortgage underwriters. Here’s what you need to know if you’re in the market for a new car and a mortgage at the same time.
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Your debt-to-income ratio and your car payment
When you apply for a mortgage loan, or even a pre-approval, the lender will check your debt-to-income ratio, or DTI ratio.
DTI shows whether borrowers can reasonably afford all of their monthly bills along with the new mortgage loan payments.
Lenders typically look for DTIs of 43 percent or less, though FHA lenders may approve a loan with up to 50 percent DTI in some cases.
If you earn $9,000 a month before taxes (gross income), then 43% of your income equals $3,870. All of your debt payments — including your new mortgage payment — would need to fit within this $3,870 budget.
A car payment plus a house payment should fit within this budget for most households. But what about things like student loans and credit card minimum payments — and what if you’re buying a second or a third car?
All of a sudden, that new car payment could limit the size of your home loan.
Will leasing a car affect buying a house?
Whether you lease or buy a new car, you’ll add money to your monthly expenses.
But there is a difference between buying and leasing a new car from the point of view of mortgage underwriters.
Even if you have a $450 monthly car loan payment and a $450 a month auto lease payment, these are seen differently by mortgage lenders.
A lease payment is essentially rent. At the end of the lease, your equity in the vehicle is zero and your net worth does not increase. You also have decisions to make once the lease term ends:
- You can lease another vehicle
- You can buy the vehicle you’ve been leasing
- You can buy another vehicle
These choices have one quality in common: They mean your need to make monthly payments will continue unless you’re able to buy a car for cash.
With an auto loan, the situation is different. Each monthly payment gives you more equity in the vehicle. After the loan is paid off the car is yours. It’s an asset that you can keep without making a monthly payment or trading in for another car.
Having a paid-off vehicle helps strengthen your mortgage application.
When car payments are not considered a debt
While car lease payments are always considered a debt for DTI purposes, that’s not always true with car loans. They may not count against you even if you pay out big money each month. This is partly because, under Fannie Mae and Freddie Mac rules, lenders can ignore monthly auto loan costs if 10 or fewer payments remain.
“Lease payments,” says Fannie Mae, “must be considered as recurring monthly debt obligations regardless of the number of months remaining on the lease.
“This is because the expiration of a lease agreement for rental housing or an automobile typically leads to either a new lease agreement, the buyout of the existing lease, or the purchase of a new vehicle or house.”
The story with auto loan payments is different.
Does leasing a car affect your credit score?
Whether you lease or buy, a new vehicle can impact your credit score.
With a lease, you have a monthly payment obligation. When the lease ends, there’s likely to be either a new lease or a new monthly cost for a vehicle purchase. In either case, credit utilization is increased, and that can reduce your credit score.
Paying down a recurring loan balance should strengthen your credit report, increasing your credit score. Higher credit scores can mean lower mortgage rates and easier loan applications.
How car leases impact government-backed mortgages by loan type
Government-insured loans like FHA, VA, and USDA loans have their own underwriting rules. Each loan type views auto leases and loan payments differently.
FHA mortgages and auto leases
Payments on car leases will always be included in your DTI for an FHA loan even if the lease term expires soon.
But if you have a car loan that will be paid off within 10 months, FHA lenders won’t have to include the car payment in your DTI. To be excluded from your DTI, the amount of money due on your auto loan each month can’t exceed 5 percent of your gross monthly income.
While some loan programs will allow you to pay down your loan balance to reach the 10-month threshold before buying the house, the FHA does not.
VA mortgages and auto leases
The VA does not distinguish between auto loans and auto leases, but individual VA lenders can, and they most likely will. The VA says debts and obligations with fewer than 10 remaining payments can be ignored for DTI purposes.
But, it also says that lenders must include “accounts with a term less than 10 months that require payments so large as to cause a severe impact on the family’s resources for any period of time.”
Confused? You bet. To clarify matters the VA gives this example:
“Monthly payments of $300 on an auto loan with a remaining balance of $1,500, even though it should be paid out in five months, would be considered significant,” says the VA.
Why? Because “the payment amount is so large as to cause a severe impact on the family’s resources during the first, most critical, months of the home loan.”
USDA mortgages and auto leases
Like FHA loans, USDA loans will always include auto lease payments as monthly debts to find your debt-to-income ratio. But auto loan payments may not count toward DTI.
If you owe 10 or fewer monthly payments on your car, USDA lenders won’t have to include your car payment in your monthly debts.
Reduce recurring payments before applying for a mortgage
Paying down your debt — auto or otherwise — before buying a home should help you qualify for a better mortgage loan.
Lower debt creates a lower debt-to-income ratio, and a lower DTI ratio can open up more home loan options for borrowers.
Paying down your credit cards, for example, will lower their minimum monthly payments, and lenders typically use minimum credit card payments when they calculate your DTI. Full repayment on an installment loan, such as a student loan or car payment, should help even more.
Lower monthly payments can increase your home buying budget
Generally speaking, lower monthly debt correlates to a bigger possible mortgage, which means lowering your monthly payments wherever possible could mean a bigger home buying budget.
Plus, your lower DTI can help you land a lower interest rate or help you qualify for a lower minimum down payment.
Reducing your monthly obligations has the added benefit of improving your credit history which also helps your mortgage or refinance eligibility.
Never buy a car after applying for a mortgage loan
A lot of first-time home buyers are just starting out in their financial lives. Along with buying a house, they also need to buy a new or used car.
But financing an auto purchase right after applying for a mortgage can wreak havoc on your home buying process. The new car payment will throw a wrench in your DTI, and underwriters will notice.
Wait until after you’ve closed on the home — and officially become a homeowner — to get a car loan, no matter what the car dealership says.
FAQs
Will leasing a car affect buying a house?
Yes. Any kind of monthly debt, including a new lease payment, will affect mortgage eligibility. A lease may affect buying a house more than a car loan. Leasing or financing a car right after applying for a mortgage loan could change the conditions of your loan offer.
Does leasing a car affect your debt-to-income ratio?
Yes, mortgage lenders will include your lease payment in your monthly debts when it calculates your debt-to-income ratio. Higher monthly debts can affect the size of your loan, your mortgage interest rate and your required down payment amount.
Does a car lease count as debt?
Yes, car leases count as debt from the point of view of mortgage loan providers. Student loans, credit card minimum payments, and personal loan payments also count as debt. Utility bills and other living expenses such as groceries and gasoline do not.
Does having a leased car affect getting a mortgage?
A car lease can add hundreds of dollars to your monthly payment obligations. Mortgage lenders consider your other monthly payments as they assess your eligibility for a home loan. Too much monthly debt can limit your mortgage eligibility.
Does leasing a car hurt your credit score?
A car lease interacts with your credit history much like a car loan would. The lease adds a hard inquiry and a new credit account which often lowers a borrower’s credit score at first. But making regular lease payments should add positive data to your credit history, potentially increasing your credit score.
The bottom line: Buying a car and applying for a mortgage
So will leasing a car affect your home buying process? Yes, it most likely will. In some cases, a lease will have a bigger impact on a mortgage application than a car loan would.
For some car shoppers, it may be best to wait a few months until you have completed your home purchase. For specific advice on your situation, it’s best to speak with a professional mortgage loan officer.
Check today's mortgage rates. Start here (Apr 1st, 2024)
