Thinking of buying a house or condo? Are you also in the market for a new car? Please read on before you make any big decisions.
When a mortgage lender reviews a mortgage application they will look at all your debts, not just the mortgage you are applying for. Too much non-mortgage debt will decrease the amount of mortgage you will qualify for, sometimes significantly.
As a general rule, when a borrower has less than a 20% down payment, lenders don’t like to see the mortgage payments, property taxes and heating costs take up more than 35% of a borrower’s pre-tax income. When other debts are added on to this, the total monthly payments shouldn’t take up more than 42%. For borrowers with excellent credit these ratios can go up to 39% and 44%.
To see the impact of non-mortgage debts on a mortgage approval, let’s take a look at two borrowers with the same basic information. Each has excellent credit, a $100,000 annual salary and a $30,000 down payment. They also have some small loans for which they pay $200 a month. Both are thinking about buying a property and are also looking into buying or leasing a car.
Borrower A decides on a Honda Civic for $200 per month. Borrower B falls in love with a BMW for $700 a month. Each then goes to their mortgage broker to get pre-approved for their purchase. Borrower A gets pre-approved for a mortgage of $545,000, allowing a purchase of up to $575,000. Borrower B goes to the same broker and gets a pre-approval for $455,000 allowing a purchase of up to $485,000. The difference between what these two borrowers can afford is $90,000, all because of a car.
For those of us who do not have unlimited funds life is a game of balancing needs and wants. If the BMW is important enough to Borrower B that they don’t mind being approved for a smaller mortgage then that might be the right choice for them. Perhaps neither of these borrowers wants to spend more than $450,000 on a purchase anyway. It's always a good idea to stay below your maximum if possible. But don't let your non-mortgage debt scuttle your plans.
If you are thinking about purchasing a home in the near future please keep in mind that all your other debts will be counted. If you can’t afford the house you want and the BMW, there’s nothing wrong with a Honda Civic (it'll be cheaper to mainain too).
Each situation is unique. If you’d like to chat about you’re your own plans please call or email me.
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John Freeland Smith