Don't Put The Car Before The House
Wednesday Sep 27th, 2017
That new car or almost new car smell is intoxicating. So intoxicating that you may forget to smell the roses.
While a car salesman may tell you they can get you approved for that new or slightly new luxury car. At no time will you see a disclosure or receive a word of caution that financing that car could hurt your future chances for buying a home. At no time will anyone tell you that it's possible you could be stuck for for the several years building wealth for your landlord instead of yourself. Quite simply, if you know you need a car and buying a home is also a possibility in the near future. Here’s a few reasons why buying a home before you buy a car is a more financially sound decision.
Appreciation Vs Depreciation
An appreciating asset is one that increases in value over time. A depreciating asset decreases in value over time.
For the sake of argument I think we can agree that a car will most likely depreciate and a home will most like appreciate. Will there be market downturns and periods of depreciation in the housing market. Sure there will be, but the market recovers. If it did not we would still be able to purchase a home for the $20,000 our great grandparents paid to purchase their homes. Cars on the other hand don’t usually recover from depreciation, very few turn into appreciating classics.
Lenders determine your home buying power using a formula known as debt to income ratio. Debt to income ratio is the total amount of your debt obligations, and proposed mortgage payment compared to gross income.
How Does The Car Payment Keep You From Qualifying For A Mortgage
Car loans will affect your ability to purchase a home, no matter how big or small the car loan, it's the actual monthly payment amount that counts. So it's not what you owe but what you pay.
It doesn’t matter, it's all the same. A mortgage lender would count a $500 lease payment with 2 years left, the same as a $500 car loan payment with 5 years left because ultimately what counts is the monthly payment not the balance or whether it’s a lease or a purchase.
For example if your household income is $50,000 per year, and you have student loan, credit card and other debt totalling $300 per month. With no car payment you could qualify for a home loan up to $250,000, a $200 car payment would qualify you for a home loan up to $220,000, and a $400 car payment would qualify you for a home loan up to $190,000.00*
Simply put the higher the car payment the less home you can afford. However, the house payment does not affect your ability to qualify for a car loan in the same way. A higher mortgage payment does not affect your ability to purchase the car as the ratio car dealers use is different than that used by mortgage lenders. In fact,in some cases the auto lenders see your status as a homeowner as a compensating factor.
Bottom Line - Do I Buy A Home Or A Car First
Ideally, you would buy the home first, to begin building your wealth, but let’s be clear in today’s world you will most likely need a car. So I would suggest getting preapproved for a mortgage to see where you are on the road to homeownership before you purchase that new car. If you can qualify for the home then move forward with the home purchase. Thus allowing you to purchase the most home you can afford and then purchase the car. I recently had a client purchase a new car the day after closing, but had she purchased before she would not have qualified for her new home. So in the end she had both the new home and new car smell.
Good News, if youre thinking of buying there are many down payment assistance programs available. To learn more about or to see what down payment assistance programs you may qualify for call us at 678-820-6642 or click here.
*Figures based on an FHA loan with 3.5 down payment and 4.125% interest rate.
© 2017, Tonya Brown. All rights reserved