Although you may need to finance both a vehicle and a home, these two basic needs can sometimes be at odds when it comes to qualifying for a mortgage. Leasing a car, albeit for a short period of time, affects your ability to afford a mortgage. Leasing a car takes a chunk out of your monthly income, lowering the amount you can put toward a home mortgage each month. A car lease, along with a new mortgage and other recurring debt cannot exceed mortgage lenders' maximum limits.
Debt-to-Income Ratios and Your Car
Mortgage lenders use your debt-to-income ratio, or DTI, to determine whether you can afford a mortgage payment. The DTI compares your monthly debt payments plus a prospective mortgage payment to your monthly gross income, resulting in a ratio that is expressed as a percentage. For example, if your total recurring debt payments, including a new mortgage and car lease, total $2,000 per month and you earn $4,000, your DTI is 50 percent. Spending 50 percent of your earnings on recurring debt payments is generally considered risky, and a lender may not approve you for a home loan with such a high DTI.
Mortgage Lender DTI Requirements
In general, lenders want you to have a maximum 43 percent DTI; that is, you use no more than 43 percent of your gross income to make recurring debt payments each month, including your auto lease and mortgage. You have a few options for obtaining a mortgage loan while you are on the hook for a car lease, even if your DTI exceeds 43 percent. Mortgage lenders may accept high debt-to-income levels if you have compensating factors such as several months of cash reserves, a high credit score or if your housing payment will not increase by much with a mortgage.
Fannie Mae, the main source for non-government conventional mortgage loans, has a maximum 45 percent DTI requirement if you meet certain credit score and cash reserve requirements. However, it will go up to 50 percent DTI if your overall credit and income profile generate an approval through a direct underwriting system, known as "DU." Also known as automated underwriting software, DU approval is the strongest form of mortgage loan approval an applicant can receive because it doesn't require a physical underwriter to approve.
Reducing Recurring Debt
If you apply for a mortgage before your car lease is over, you reduce your purchase or refinance power. But a high DTI can be offset by a smaller mortgage that has a smaller monthly payment. Opting for less mortgage liability and leaving all other recurring debts intact can lower your DTI sufficiently and allow you to qualify for home financing.
You can also pay off your car lease before applying for a home mortgage, or wait to lease a car until after you have closed on a home mortgage. Having less recurring liability for a vehicle or any other recurring debt optimizes your ability to afford a bigger mortgage payment. Eliminating or reducing auto loan payments, credit card debt or other types of financing is a good option if you want to qualify for the highest-possible mortgage amount and have the greatest purchasing power as a homebuyer.
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