Car versus house

You may not have ever thought that you would have to make a choice, but the reality today is that you may have to choose – a new car or a new home.

Many first-time homebuyers are finding out the hard way that they have now have to decide between the two.

We all love the smell and prestige of a new vehicle, but the attached monthly payment may prevent you from qualifying for mortgage financing.

If you are thinking about purchasing a home, but also have thoughts of buying a new vehicle, the reality is that you may have to make a choice or at the very least do some planning ahead if you are serious about owning a home of your own or moving up.

A zero interest rate car loan might sound like a great idea but don’t be tempted by the long term, low interest loans available on new vehicles.

A $500 monthly car payment will reduce the amount of mortgage you can qualify for by approximately $100,000 based on today’s interest rates.

I see many new vehicle payments into the $600-$900 a month range so we can see how these high payments can affect your ability to qualify for mortgage financing.

Mortgage lenders use two different ratios to determine how much you can borrow to purchase a home. They compare your total monthly housing costs (GDS) and your overall total obligations (TDS) as a percentage of your total monthly gross income.

If your total debt service ratio is too high with your vehicle payment then you may not qualify for mortgage financing or it may restrict your budget to the point that you can’t purchase the home of your dreams because your budget is too small for the market where you live.

It doesn’t matter whether it is a lease payment or a loan payment as either are included in your monthly obligations for debt servicing.

Self-employed? Ensure that all the payments are managed through the corporate bank account as this can help when it comes time to qualify for a mortgage.

Shopping for a new vehicle can also hurt your credit score which is an important component of qualifying for mortgage financing.

Every time you sit down with the business manager at a car dealership, with your written consent, they will check your credit in order to advise on what vehicle loan options might be available to you.

These multiple credit inquiries over a period of time can lower your credit score and may affect your ability to qualify for a mortgage.

Everyone is tempted by new vehicles but buying used or waiting until after you make your home purchase may be prudent if you are serious about home ownership.

Sometimes it’s hard to have both. Think about your financial future and if buying a home in the next few years is in your plans please check your budget to ensure you can still accomplish your goal of home ownership.

Holding off on the new car or buying a good condition older vehicle might be the better plan. It’s hard to have a big car payment and a mortgage payment at the same time.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.