If you are on the verge of taking the plunge and buying a home, you should be aware of what mortgage lenders look for when they attempt to qualify you for a loan. Naturally your income and the amount of debt you shoulder are taken into account in the mortgage approval process, but so is the type of debt you have, including car loans and leases. Understanding what lenders look for can help you get a lower interest rate on your loan.
Prospective homeowners are concerned with how much home they can afford. Calculating their debt-to-income ratio provides buyers with a good idea of how much income will be available for monthly mortgage payments including the principal on the loan, interest payment, taxes and homeowners insurance (PITI). Generally, experts believe the PITI should not exceed 28 percent of gross income. It is also recommended that the total amount of your debt-related expenses should not exceed 36 percent of your income.
Car Leases and Mortgage Qualification
When lenders calculate the amount of monthly expenses you have as a percent of your total income, they treat a car loan or lease payment in the same way. While a car loan eventually results in you owning the car and a lease does not, a loan or lease expense is considered a regular monthly expense. Both are monthly obligations and are considered as debt in your debt-to-income ratio.
Both lease payments and car loan payments are considered debt until they are fully repaid. The only exception is if the car lease is within 10 months of repayment. In this case the payment is not considered in the borrower's debt-to-income ratio.
Other Loan and Lease Considerations
Lenders look carefully at a potential borrower's ability to repay the mortgage. Just like car loans, car lease payments that are too high may disqualify a borrower from a mortgage. If lease payments are high compared to overall income, it may be enough to disqualify a borrower from getting a mortgage.
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