Don't Buy a Car - or Did You Already Buy One?
When Income Grows and You Want to Buy "Stuff"
When an individual’s income starts growing and they manage to set aside
some savings, they commonly experience what may be considered an innate
instinct of modern civilized mankind.
The desire to spend money.
Since North Americans have a special love affair with the automobile,
this becomes a high priority item on the shopping list. Later, other things
will be added and one of those will probably be a house.
However, by the time home ownership has become more than a distant and
hopeful dream, you may have already bought the car.
It happens all the time, sometimes just before you contact a lender to
get pre-qualified for a mortgage.
As part of the interview, you may tell the loan officer your price target.
He will ask about your income, your savings and your debts, then give
you his opinion. "If only you didn’t have this car payment,"
he might begin, "you would certainly qualify for a home loan to buy
that house."
Debt-to-Income Ratios and Car Payments
When determining your ability to qualify for a mortgage, a lender looks
at what is called your "debt-to-income" ratio. A debt-to-income
ratio is the percentage of your gross monthly income (before taxes) that
you spend on debt. This will include your monthly housing costs, including
principal, interest, taxes, insurance, and homeowner’s association
fees, if any. It will also include your monthly consumer debt, including
credit cards, student loans, installment debt, and…. car payments.
How Buying a Car Reduces Your Purchase Price
Suppose you earn $5000 a month and you have a car payment of $400. At current
interest rates (approximately 8% on a thirty-year fixed rate loan), you
would qualify for approximately $55,000 less than if you did not have the
car payment.
Even if you feel you can afford the car payment, mortgage companies approve
your mortgage based on their guidelines, not yours. Do not get discouraged,
however. You should still take the time to get pre-qualified by a lender.
However, if you have not already bought a car, remember one thing. Whenever
the thought of buying a car enters your mind, think ahead. Think about
buying a home first. Buying a home is a much more important purchase when
considering your future financial well being.
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