How do car loans affect qualifications for home loans? Is it more important to have larger down payment or little or no debt when applying for a loan?

Asked by Homebuyer, New York Mon Oct 31, 2011

Hello, I am a potential first time buyer looking for advice on purchasing a home. I am in my mid 20's and have had a steady job for three years plus. My goal is to purchase a home in the next 8mo-1yr, with at least 35k down for a 190k max home price in queens NY area. My credit score is upper 700/lower 800 range. Student/private loans paid in full. No balances on credit cards. Only debt is a car loan. How do car loans affect qualifications for home loans? Is it more important to have a larger down payment or little or no debt (car loan in my case) when applying for a loan? I am only a few months into the auto loan. Please advise.


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Dan Tabit, Agent, Issaquah, WA
Mon Oct 31, 2011
I've started as a lender in 1998. Your car payment will reduce your home buying capacity. If a lender allows a debt ratio of 45% and you make $5,000 per month, your total allowable debt payments would be $2250 per month. If $500 of this is already going to a car payment, your maximum house payment will now be $1750. The actual ratio will be different, this is just an example.
Buying your first home is a major step and it sounds like you are doing a great job with your job & credit. When you meet with a lender they can look over the specifics of your situation and advise you based on more information. Until then, I would make your car payment on time and save all you can. You can always pre-pay the car if you want to go lower down payment.
1 vote
Katie Kuo Hwa…, Agent, New York, NY
Tue Nov 1, 2011
Hi, When a bank look at your mortgage loan application, they are not just looking whether you have a car loan or a student loan, but the total debt to income ratios. Usually, there are two ratios. One is the housing debt ratio (all expenses related to housing) and total debt (housing debt + other outstanding debt ). The ratios usually are 28% and 36% respectively of your total income based on monthly basis. Your income level is also important in the calculation. If you purchase co-op / condo there is also maintenance charges and common charge, which also as part of your monthly housing debt calculation. Although banks have their own internal policies, a large down payment is always welcome. Because it will lower the risk for the bank in such transaction, you will not have to pay private mortgage insurance. Although you are the first time home buyer, unfortunitely the government credit program may have already expired.

It seems that you are very care about your credit with paid student loans and no other debt but the car loan. If you have sufficient income in comparsion to the debt ratio, then should no problem in getting a mortgage. Please let me if I can be of further help. I will be gladly to work with you.

Katie Kao
0 votes
Anna M Brocco, Agent, Williston Park, NY
Tue Nov 1, 2011
Consider visiting with any licensed loan officer, after reviewing your overall financial information, he/she can better advise as to what needs to be done, if anything, in order to be able to purchase in the near future--that way when the time arrives you'll be prepared; keep in mind that before beginning your search, a mortgage pre-approval letter is required in order to determine your price range and for any offers to be taken seriously. If you need loan officer recommendations, feel free to contact me directly.
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Rich Golze, Agent, Vancouver, WA
Tue Nov 1, 2011
To add on to Dan's comments, the more down payment you have, the less mortgage insurance you have to pay all the way down to 20% down where you dont have any mortgage insurance requirements.

Having a good mix of credit will help keep your credit score high.

Also as a first time homebuyer, you may qualify for the new federal mortgage tax credit. There are income limits to it and it is different than the old $8000 tax credit.

Email me if you want additional information. Many of my clients use this tax credit to pay for their mortgage insurance premium.

All the best,

0 votes
Homebuyer, Home Buyer, New York
Mon Oct 31, 2011
Thanks for the note Terry. To clarify, I do use my credits cards, but don't carry a remaining balance after a bill is due. I have thought of contacting agents, but didn't want to waste anyones time as I don't plan on buying immediately. However, I will give it some thought now. Thx
0 votes
Terry Bell, Agent, Santa Rosa, CA
Mon Oct 31, 2011
Well, you will probably hear from many lenders and I suggest that you contact one and start working with them to see what you can qualify for. You sound pretty focused and probably are pretty educated already about the wisdom of credit. There are many websites with guidance about credit cards. You should use cards sparingly so you can show that you have large balances of available credit that you don't use, but use your cards enough to show that you pay your bills on time. A loan broker can give you an idea of what you will be able to qualify for, but don't wait to start talking to agents as well. It's really a good part of the formula to have your team in place, an agent that you trust their guidance, and a lender that has helped you prepare when just the right place pops up! Good Luck! Terry Bell, Realtor, Santa Rosa, CA
0 votes
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