Real Estate
February 25, 2020
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How much of your mortgage income should be going towards an auto loan?

By: Scott Sheldon
January 25, 2019

Buying a house can always be a daunting consuming feat. Carrying consumer obligations such as car loans can further complicate a picture of what otherwise could be more financially lucrative. When you carry a car debt whether it’s a lease payment or whether it’s a financed payment you’re handcuffing a portion of your future income.

Auto loans help your credit from a credit score standpoint, but they also limit your borrowing power and at the end of the day probably do more harm to your financial picture for qualifying to buy a home than good. It doesn’t matter if your interest rate is 1 percent or 0 percent. If your income is not enough to support a house payment, it might be time to think about getting rid of the car.

Take the following considerations into account:

For $10,000 per month of income your car payment should be $200 per month, $9,000 per month of income, the car payment should be $180 per month. $8,000 per month of income the car payment should be $160 per month and $7,000 per month of income your car payment should be $140 per month

The list goes on as you can see for every $1,000 of income you want your car payment to be $20 per month less. For every $20 per month of car payment you want to have your income be $1,000 upwards in support of that calculation.

Here is why…

Many families don’t have just car loans or car lease payments there are also credit card payments, personal loan payments to name a few. The other 5 to 10 percent of your income should be allocated towards those monthly expenses.

Ideally, don’t have those monthly expenses and use the other five to 10 percent of your income towards saving. The ability for you to purchase a house should be predicated on your ability to save money beyond your mortgage payment (not just the principal portion of your monthly repayment on your fixed rate mortgage).

This also means any monies you’re contributing to your 401k. This is what you should be doing through your employer anyway if you are a W-2 employee. If you are a self-employed wager contributing to an IRA is a fantastic way to plan for retirement.

The bottom line is, when you purchase a house regardless if its a first-time, a second time or third time you want your monthly consumer liabilities to be as absolutely low as possible, because the lender is concerned about the payments that you are making on those obligations; not the interest that you’re paying which is what you focusing on.

To be successful as a home buyer, you need to think like the lender and focus on the monthly payment. By whittling down your monthly expenses, you can best position yourself for purchasing a home. This can be accomplished by paying the monthly debt off, possibly getting a co-signer depending on what your future income is or work on changing your role or occupation, so you can earn more money for the purposes of getting out of debt faster while purchasing a home and saving at the same time.

Looking to buy a home? Get a no cost quote now.

Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.