How can buying out your car lease affect your options for getting a mortgage?

Question

Hello everyone!

I am looking to purchase my first rental property but I also have my vehicle lease ending in 2 months. I am wanting to buy out my car lease but am wondering how this will affect getting a mortgage. I know when you purchase a car they tell you not to do it at the same time as buying a house but I don't know if buying out a lease has different affects (since it's a less amount, I've already been making payments, etc.)

Any advice would be helpful as this seems to be a situation I can not avoid! Thank you :)

Erik Estrada · Answer

Hey Samantha,

I would recommend speaking with as many qualified lenders to see which route makes the most sense.

The drawback to a DSCR loan is the PPP (Which can be bought out). This will result in a higher cost loan if you plan to refinance soon.

The benefit is that you can qualify with no DTI restrictions and you are able to close in an entity. Rates are similar to conventional investment property loans, however the fees may be higher.

What is the cost to buying out the lease? This is where I would start to weigh in the pros and cons of going conventional or DSCR

Samantha Ward · Answer

Hey Jason! Thank you for all those points. To clarify I would be purchasing the property out of the state I am in so would that still affect how they look at my transportation needs? Also for the area I reside in you don't even need a vehicle, you can walk to everything anyone could possibly think of and when I do need to go further I have my own electric scooter.. I know that can sound a little silly but it works for my lifestyle. Unfortunately the company I am leasing through does not allow extensions as that was actually my initial plan!

Jason Potrzeba · Answer

Hi Samantha-

Here are a few random comments…

If your new auto loan payment is lower than what you were paying for the lease, your DTI could improve.

The new auto loan/inquiry may initially give your score a momentary hit.

Even though your lease is coming to an end, many conventional underwriters may still debt you for an auto payment. Their argument is that you will still need some transportation once that car is turned in. Unless you can convince an underwriter that someone is giving you a car, you’re buying a car all cash or you’ll be getting a bus pass, expect to still be hit for an auto payment…

Most lease companies will allow you to extend the lease for up to an additional 6 months. If you think rates will be lower in 6 months, that could be a good option too. Your buyout will be a few dollars lower and if you grab a better rate, your overall loan payment would be lower as well.

Tyler Warrick · Answer

For Conventional you must qualify for 1) income 2) assets and 3) credit. For DSCR (Debt Service Coverage Ratio) you qualify based on if the property will cash flow or not (Does the rental amount cover the mortgage payment at least 1:1). Not all lenders do DSCR loans.

Conventional loans -- you should know if you pre qualify before you purchase the home.

DSCR loans -- it's harder to tell, as you must wait for an appraiser to give their opinion of fair market rent.

What state are you looking to purchase in?

Samantha Ward · Answer

Wow this was great info to know! Would you know in the pre-qualification process if you qualify for a conventional loan vs a DSCR? Do lenders typically work with both options or would I need to find different specialized lenders to work out each option? Thanks again for getting back to me!

Tyler Warrick · Answer

Oh my goodness, I didn't even see that part in your first sentence! Thank you for pointing it out.For Conventional loans (best rates on investments) everything I said is still true. However, you will be able to "offset" the subject property's mortgage amount based on the fair market rent that the appraiser deems is fair for the property/area. Keep in mind they will use 75% of the monthly rental amount to offset the mortgage payment (i.e. the fair market rent is $2000/mo, the lender will be able to use $1500/mo as income to offset whatever your mortgage payment comes out to).

DSCR options are great if you CANT qualify for Conventional loans. They have higher rates and typically have prepayment penalties, however they require much less documentation.

What state are you looking to purchase in?

Samantha Ward · Answer

Hi Tyler!

Thank you for asking for clarification - I would be financing the remaining balance. I also would not be making this a primary residence but purchase the property directly as an rental property. I am looking out of the state I live in and having everything done remotely

Tyler Warrick · Answer

Hey @Samantha Ward, great question!

If you are looking to purchase a primary residence, then a DSCR option that Nick mentioned will not apply to you.

My question to you is: are you buying out the lease in full, or are you going to finance the remaining balance? If you are buying it out (no loan) then it will not show up on your DTI. If you are going to be financing the remainder, then that payment will be included in your DTI.

I always tell my clients this: you need to qualify based on 1) income 2) assets and 3) credit. If you can qualify based on all three of these regardless of how you move forward once the auto lease ends, you have nothing to worry about.

Hope this helps!

Samantha Ward · Answer

Thank you for responding so quickly! I am completely new to all of this so just clarifying - when I buy out my lease it will be for a 3-7 year period. It sounds like from what you said it would show up on my DTI in that case. I haven't yet looked into a DSCR loan and what the differences would be.

Nick Belsky · Answer

If you are doing conventional or agency financing, the lease will be added to your liabilities and included in your DTI.  If you have an auto liability that is ending is less than 10 months, then it will be excluded from your DTI.

If you are using a DSCR loan to purchase, it won't matter as personal income, DTI, and employment are not considered for being approved for the loan.

Cheers!