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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 a New Car Payment 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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