In this post, we're talking about car payments and how they affect mortgages. As loan officers, we're in the business of trying to calculate how much a person qualifies for or not. Because car payments are such an everyday part of life for so many people, we wanted to give a brief rundown of how your car payments might be affecting your mortgage purchasing power.
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There are two main buckets our borrowers tend to fall into
The first bucket is going to be what we're going to call the first time home buyer bucket. This is that person who's buying their first or second home and they're starting a family. In these cases, often their income is not where they want it to be and their expenses are probably a little bit higher than normal because they're having to buy cribs and minivans and things like that. For them, these car payments can really impact what sort of home, if any, they can look into buying.
Then we've got those who are refinancing. These are more veteran borrowers that've been in their home for longer periods of time and have more seasoned income. They might have a travel trailer and two decent cars. These car payments are big and their mortgage interest rate might be sitting at 3.5% and they want to refi, and it's like all of a sudden, your income is good, but you got some big debt and you've got some big car payments, and you're wondering how this is going to affecting your mortgage. These car payments, when you really break down what it means to your overall budget and how it impacts a mortgage, is a big deal.
The question you should be asking yourself is: If you didn't have your car payment, how much more could you qualify for—how much more home could you buy?
How much more home can I get if I don't have a $250 car payment?
A $250 car payment equates to about a $50,000 mortgage. Not many people are buying houses for $50,000, but what this really means is you can add this to your potential home buying power, your purchasing power. So, with the car payment of $250, you can afford a $200,000 house, but without that $250 car payment, you could afford a $250,000 house. And today, that's a big deal.
How much more home can I get if I don't have a $400 car payment?
If your car payment is $400 a month, that equates to roughly $80,000 that could go into buying a new home.
How much more home can I get if I don't have a $600 car payment?
If your car payment is $600 a month, that equates to roughly $120,000 that could go into buying a new home.
How much more home can I get if I don't have a $1000 car payment?
If your car payment is $1000 a month, that equates to roughly $200,000 that could go into buying a new home.
We recommend keeping your car payments as low as possible
Especially for first time home buyers, we suggest keeping your car payment as low as possible. After you get established in your home, then go and purchase that car.
If you have any questions about this or if you have any questions you'd like us to answer on our podcast, you can submit your questions using our contact form or give us a call at +1 (602) 535-2171. Be sure to ask us for a free quote on your next mortgage. We'll personally work with you and help you through the whole process.
Frequently Asked Questions
How much more home can I get if I don’t have a $250 car payment?
How much more home can I get if I don’t have a $400 car payment?
How much more home can I get if I don’t have a $600 car payment?
How much more home can I get if I don’t have a $1000 car payment?
Be sure to ask us for a free quote on your next mortgage. We'll personally work with you and help you through the whole process.
Curious about the impact of your car loan on your mortgage prospects? You might also want to read about spouse-related mortgage concerns, learn the details of grossing-up income, consider whether you can obtain a third mortgage, and check out how fast is too fast to close a loan.
Mortgage Brothers LLC does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Mortgage Brothers NMLS 1007154, NMLS #210917 and 1618695. Equal Housing Opportunity.
Transcript of the Mortgage Brothers Podcast
How Car Payments Affect Your Mortgage Approval & Buying Power
Introduction [00:05]
Welcome to the Mortgage Brothers Podcast! I'm Eddie Knoell, and I'm Tom Knoell. Today, we're diving into a topic that many homebuyers and homeowners overlook:
- How do car payments affect your mortgage?
- Can they reduce your home-buying power?
- Should you buy a car before or after a home purchase?
Let's break it down!
The Key Question: Does a Car Payment Help or Hurt My Mortgage? [00:19]
Many borrowers ask:
- Does having a car payment help my mortgage approval?
- Does it hurt my ability to buy a home?
- How much does my car payment affect my loan eligibility?
The short answer: A car payment reduces how much house you can afford.
For every car payment you have, your mortgage lender must account for it when calculating your Debt-to-Income (DTI) ratio.
How Car Payments Impact Mortgage Approval [00:30]
Let's say you're Bob Borrower, and you call us with this situation:
- You have a $400 car payment.
- You have credit cards with balances.
- You earn a fixed monthly income.
As lenders, we assess your debt-to-income ratio (DTI) to determine how much house you can afford.
Car payments are one of the biggest fixed expenses affecting your home-buying power!
Two Types of Borrowers Affected by Car Payments [01:17]
1. First-Time Homebuyers (or Second-Time Buyers)
- Usually younger, with lower income and higher expenses.
- Have car loans, student loans, credit card debt.
- Every monthly payment reduces how much house they can afford.
- Car payments can put them out of the home-buying process completely.
2. Homeowners Looking to Refinance
- More experienced borrowers with higher income.
- Own RV loans, luxury car payments, or multiple auto loans.
- Want to refinance a low-interest mortgage (e.g., 3.5%).
- High car payments limit refinance options due to debt ratio.
Regardless of income level, car payments add up and affect mortgage eligibility.
Real Examples: How Car Payments Lower Your Home Affordability [03:02]
Many borrowers don't realize how much their car payment affects their mortgage approval. Let's break it down:
Car Payment Amount → Lost Home Buying Power
- $250/mo → Lose $50,000 in home affordability
- $400/mo → Lose $90,000 in home affordability
- $600/mo → Lose $140,000 in home affordability
- $1,000/mo → Lose $235,000 in home affordability
For every $100 in car payment, you lose about $20,000 in mortgage approval!
Real-World Example [06:16]
A borrower applied for a mortgage six months ago. When they came back ready to buy, they had:
- Bought a new car with a $600 monthly payment.
- Lost $140,000 in home affordability.
- Could no longer qualify for the home they wanted.
Moral of the story: If you're planning to buy a house soon, avoid buying a car first!
Common Misconceptions About Car Loans & Mortgages [07:04]
“Lenders don't count car loans in mortgage approval.”
False. All monthly debts, including car loans, count toward your Debt-to-Income ratio (DTI).
“Everyone needs a car, so lenders won't penalize me for a car loan.”
False. Even though cars are essential, lenders still count the debt as part of your total obligations.
“I can afford my car and a house.”
Maybe, but your lender determines affordability based on income, debts, and loan guidelines.
“I can pay off my car loan later.”
Paying off a car loan before applying for a mortgage may improve your approval odds.
Key Takeaways: Should You Buy a Car Before or After a House? [07:58]
- If you're planning to buy a home soon, wait to buy a car!
- If you have a car loan, consider paying it off before applying for a mortgage.
- If you're refinancing, check how much your car loan affects your loan eligibility.
- Always talk to a mortgage lender first before making big purchases!
Remember: Every $100 in car payment reduces home affordability by $20,000.
Need Help? Contact Us Today! [08:00]
If you're unsure how your car payment affects your mortgage, we're here to help!
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Call us for a personalized mortgage review
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Final Thought: A car loan might not seem like a big deal, but it could be the difference between buying your dream home or settling for less. Plan wisely!