RE/MAX REALTY ONE INC.
102-50 BURNHAMTHORPE RD W. MISSISSAUGA, Ontario L5B3C2
Telephone: 905-277-0771 Fax: 905-277-0086
When the economic times are buoyant, or you have just finalized a lucrative deal, or even if you have just received a raise in your job, you may be confronted with what seems to be an integral instinct of the inhabitants of modern civilization: the desire to buy a new car.
You have looked carefully at your financial standing and have figured that you can certainly afford the payments for that shiny new status symbol, so pretty soon you have the keys in your hand and are looking forward to many miles of pleasant motoring.
Things are still going well, so a while later you realize that it might be time to buy a new home, so you set up an appointment with a loan officer to see about obtaining mortgage prequalification. The lending institution crunches all the numbers and then comes up with the devastating news: You would have qualified for the loan in order to buy the house of your dreams if it wasn't for your car payment.
The Debt To Income Ratio is an extremely important aspect for any lending institution to consider when extending mortgage loans. This ratio is essentially the total percentage of your gross income that you spend on servicing your existing debt each month. The expenditures rolled up in this ratio include all of your basic residential costs such as principal, interest and taxes, as well as home insurance, strata fees if any, and other fixed expenditures. However, the ratio does not stop there, as it also takes into consideration all of your outstanding consumer credit such as credit cards, lines of credit, instalment debts, student loans, and much more. Essentially if you owe money to anyone, it will be considered to be a part of your Debt To Income Ratio.
Since car payments are usually an individual's second largest monthly expenditure after rent or mortgage, the choice of what you drive, and how much you have decided you can afford to pay for it, can have a powerful influence on your mortgage qualification ability.
Let's take the instance of an individual who earns $6,000 a month and has a car payment of $500 a month. With current interest rates, that person is likely to qualify for close to $50,000 less than they would have if they were driving around an old beater car that they had paid cash for. In fact it can be stated that in many instances, the actual current blue book value of your financed or leased car can be multiplied by two or even three and that total sum represents how much is going to be knocked off your mortgage qualification. If you drive a flashy SUV or luxury car, you could be looking at knocking $150,000 or more off the amount of mortgage funding you would have otherwise qualified for. In many Canadian markets that amount of money can mean the difference between that magnificent four bedroom, three bath sprawling house on the fairway versus a dowdy, mediocre two bedroom bungalow in a tacky neighbourhood.
Of course this factor applies with any form of financed or leased vehicle, whether it be a motorcycle, boat, or motor home. The ratio takes all of your debt into consideration and vehicular debt is by far the greatest single consumer credit liability for most people. If you've already purchased the vehicle then your choice is clear: Sell it, then apply for the mortgage. You have to be particularly wary or leasing a vehicle when you may be in the housing market soon, as leases are notoriously difficult if not impossible to get out of. With a financed vehicle you may have to sell it for a loss when its current value does not match the loan payout figure, but at least it will be gone.
If you are even remotely considering purchasing a home in the near future, your best bet is to steer far away from all that shiny new metal in the brightly lit automotive showrooms. You would be far better off squeezing another year out of your old, paid-off car than to fall short of that dream home that could have been yours if you hadn't been saddled with such automotive debt.