Can Car Debt Prevent You From Getting A Mortgage?

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January 27, 2012

Most people don't think that car debt can actually affect your chances of getting a mortgage, but it can. Here are several things you should know regarding this.

Debt to Income Ratio

Mortgage lenders will look at how much money you make and compare it to how much money you owe. Having car debt can increase the amount they see as debt. If your debt is too high compared to your overall income, then it may become difficult to find mortgage financing.

Before you start applying for mortgage loans you should do some rough math to see what you will qualify for. Get a piece of paper and record all of your monthly payments and total them up. Include everything: credit cards, student loans, car payments, insurance, etc. Take this total number and multiply it by 35%. What you expect to pay on a home should not exceed this amount. This number probably isn't that high. This is where the income aspect comes in to play. If your debt is high as compared to your income, then the mortgage companies are more likely to pass you by. If you take the high car payment out of this equation, you have a greater chance of getting the mortgage you want.

Pay Down Your Car Loans

If you are planning on purchasing a home and you have car loans that are high, you will want to spend some time making extra payments on the car to help lower the overall debt. This can go a long way in getting you approved for the amount of money you need for your new home. If you don't do this, you may not qualify for the home you desire. A house is a big purchase, and it's something you will enjoy for many years. It's worth it to spend some time getting the car debt reduced.

How to Have Both

You won't have to choose between a new car and a home. Transportation is obviously something we all need. But you shouldn't have to sacrifice a new home in order to have reliable wheels.

Instead of opting for the brand new luxury SUV, think of your needs. A vehicle only needs to get you from place to place. Consider purchasing a car with fewer luxury items. You don't really need heated seats or built-in GPS systems. These small things can add up quickly in the cost of the car.

Also take in to account how many cars your household needs. If you don't have a large family you may only need one vehicle. Or if you do need a second vehicle consider getting a used car that you can afford to pay cash for so you won't have multiple car payments.

If you are looking to purchase a new car, consider finding a car that's a few years old. Cars depreciate in value rather quickly, and you can save several thousands of dollars if you go for a car that is two years old versus one that is driven brand new off the lot. It will lower your monthly payments, and lower your debt ratio making it much easier to qualify for the mortgage loan.

You want to look at all the aspects to decrease your car debt if you're serious about taking out a home mortgage. The more you can do to better your chances, will be the more likelihood you can get approved.

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