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Don't Buy a Car - or Did You Already Buy One?
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Back to: Buyer Tips | Next Article: The Business Cycle and Buying a Home
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 always had a special love affair with the automobile, this becomes a high priority 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 - just before someone contacts a lender to get pre-qualified for a mortgage, they go out and buy a brand new car.
As part of the mortgage interview, you may tell the loan officer your target price. He will then ask about your income, savings and debts and then he will 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 a New Car Payment Reduces Your Purchase Price
 Suppose you have a monthly car payment of $400, and let's assume you have the ability to obtain a $100,000 loan at current interest rates (approximately 6% on a thirty-year fixed rate loan). In the lender's eyes, your ability to pay for a $100,000 loan would be reduced to the ability to pay a $90,000 loan - $10,000 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-approved by a lender.
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.
All Articles ©2000 Real Estate ABC
No articles may be reprinted or displayed without permission
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This information is deemed to be accurate but not guaranteed.
You are advised to independently verify any information
or data that influences your decision to purchase or sell
a property. The current listings & closed transactions
are taken from the Southern California Multiple Listing Service
and may not be the work product from any one agent or broker.
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Tony Dove, REALTOR®
Direct: (714) 283-1116
Toll Free: (800) 615-2707
Email: Tony@TonyDove.com
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