When you get a raise or accumulate some savings, you may find yourself confronted by an innate instinct of modern civilized men and women. 

The desire to spend money. 

It begins simply, by going out to restaurants, then accelerates to purchasing clothing, electronic gadgets, and since North Americans have a special fondness for the automobile, you may even buy a "brand new car."

If you're married or ambitious, a few months later your thoughts eventually turn toward buying your own home.  Or a move-up home, if you are already a homeowner. 

Next, you contact a loan officer to get prequalified for a mortgage loan. You state your desired price and how much you can put down.  You provide your income and may even supply pay stubs and W2 forms.  The loan officer methodically crunches the numbers (by telephone, in person, or even over the internet). 

"If only you didn't have this car payment..."

Debt-to-Income Ratios and Car Payments

You see, 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

For example, 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.

Do not buy the car.  Buy the house first.

copyright 2000 by Terry Light and RealEstate ABC