Leasing Or Buying Car May Affect Mortgage Loan Approval

Be Cautious When Buying a New Car Before Applying for a Mortgage

It is quite often the case, where a prospective new Seattle homeowner also decides to purchase a new car before buying a home. I have worked with several Seattle area home buyers recently who needed to purchase a car before moving to Washington state. I always caution home buyers about the potential pitfalls of buying a new car where it concerns their credit and debt to income ratios. Surprising to most, there can also be a hazards when paying off a car loan before applying for a mortgage.

There's plenty of online material to help you choose your optimal path, but this 3-minute piece from NBC's The Today Show serves as an excellent summary. In it, you'll learn about the basics of leasing a car, and for whom leasing can be a great fit. You'll also hear reasons to avoid a lease completely.

The Today Show interview makes all of the following points :

  • Leasing allows you to drive a car that may not be affordable otherwise
  • Leasing puts you in a new car, with the newest safety features and gadgets, every few years
  • Buying a car means that you have no mileage limits, and can sell the car when you wish

So... Should You Lease a  New Car or Buy One?

Even if you do not plan to purchase a home for a while and you are looking to get a new car, you may still wish to consider the impact of buying a car, verus leasing. Like most financial questions, the answer depends on your particular situation. For some people, leasing a car presents distinct economic advantages. For others, buying a car is the way to go, and many people prefer the advantages of true ownership and control.

For many people buying a car is preferable to leasing one, with the primary exception being those people who can claim their car or truck as a tax deduction. Be sure to check with your tax advisor or accountant if you plan to lease a car for tax reasons.

Buying Vs. Leasing and Debt to Income Ratios

For those who are presently looking to purchase a home -- leasing a car may invite mortgage loan approval trouble. This is because a car lease payment is assumed by a mortgage loan underwriter to be a perpetual debt; one that never goes down or is paid in full. When a lease is complete, it must be replaced with a new lease, and so on. Therefore, no matter how many payments remain in a lease, mortgage applicants must use the full car lease payment for purposes of a mortgage approval.

In contrast, for people who are owners of their automobiles, those car payments are only added to debt to income ratios if more than 10 car payments remain until the car's loan is paid-in-full. For homeowners and buyers, this can improve debt-to-income ratios and support a higher purchase price on a home, which is especially important in our area, where home prices are significantly higher than the national average.

Either way, particularly if you are a year or less away from purchasing a new home in Seattle, be sure to discuss your financial situation with a strong mortgage lender. Everyone's situation is different, and it's important the loan officer you are working with has an interest in setting you on the right path to home ownership.

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