New Job, New House, New Car, Right?
When I graduated from school and got a “real job” the very first thing I did was go house hunting. I was relocating across the country and our little family had had enough of apartment living. We traveled to Austin and in a matter of 48 hours found a house we liked, submitted an offer, signed some papers and caught a plane back to Salt Lake City.
About seven weeks later we loaded up our U-Haul and headed back to Texas for good. After a few nights in a hotel it was finally time to close on our house. As we were sitting around the table, signing dozens of documents, our loan officer asked non-nonchalantly, “Now, you didn’t do anything crazy like buy a car since we last saw you, did you?”
My wife and I glanced nervously at each other. We had, in fact, bought a car. Truth be told, we weren’t all that sure that our 1998 Chrysler Cirrus would have made the 24 hour drive to Texas. So, with the promise of full time employment on the horizon and a new life about to begin in Texas, we figured we may as well add a new car in to the mix as well. How were we supposed to know that was a bad idea?
As our loan officer tried to hide the rolling of his eyes, our hopes and dreams of owning the beautiful three bedroom, two-and-a-half bath, Texas limestone home, situated perfectly in the middle of a cul-de-sac, seemed like they were being flushed down the proverbial toilet.
When the loan officer saw the nervous glances between my wife and I, he got an exacerbated look on his face and started hounding us with questions, all while my wife broke in to tears.
Why Buying a Car is a Bad Idea
When determining your ability to qualify for a mortgage, a lender looks at your “debt-to-income” ratio. That ratio is the percentage of your gross monthly income (before taxes) that you spend on debt. This includes your monthly housing costs (principle+interest+taxes+insurance+HOA fees), it also includes your monthly consumer debt, including credit cards, student loans, installment debt and…..ready for this? Car payments.
So in reality, not only should you not buy a car shortly before you buy a home, but you should also refrain from adding to your debt by making other major purchases (furniture, appliances, electronics, jewelry, vacations, paying for a wedding, etc.)
How a New Car Payment Reduces Your Purchase Price
As an example, suppose you earn about $5000 a month and your car payment is $400 per month. Using an interest rate of 8% you would qualify for approximately $55,000 less for your home purchase than you would if you did not have the car payment.
Even if you manage your finances in such a way that you personally feel there will be no problem in meeting your mortgage payment, your lender might not agree.
So if you are considering buying a home and buying a car remember that that extra car payment could complicate things and perhaps hold off for a little while.
Luckily the purchase price of our Texas home was far below what our lender was willing to lend us, so our debt-to-income ratio was still acceptable. We walked out of the title office that day with the new keys to our new home in hand, but we also learned a valuable lesson for the next time!
Utah’s Real Estate Experts
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