Leasing a new car (Conventional DTI Concerns)

100 Replies

So I decided to sell my luxury car in order to free up more capital for real estate deals.

I couldn't justify having a lot of cash tied up in an expensive vehicle anymore knowing I could be investing that money.

I currently have no wheels so I obviously need to replace the car I just sold with something more economical ASAP.

Here's where I could use some input/advice particularly from you mortgage brokers and conventional lenders:

I'm self employed (10+ years) but my tax returns show low income due to business expenses and write offs.

Although my net income shows low on paper I have zero debt, Tier 1 credit and a healthy amount of cash on hand.

Technically my DTI is still okay (per Fannie/Freddie guidelines) since I have literally no debt of any kind reported.

With that being said I'm afraid if I go lease a new vehicle, even if it's something cheap, it may impact my DTI just enough to affect me being able to qualify for conventional Fannie/Freddie loans since there would be debt reported then.

Right now I'm actively looking for a conventional Fannie/Freddie lender to work with for acquisitions and cash out refinances. I'd hate to go lease a new car this week only to find out I can no longer qualify because of the lease. 

Would it be wiser to buy something cash again (but cheap this time) to stay debt free and not take the chance of negatively impacting my DTI any further since my income already shows low as it is?

Thanks in advance and if you need further information and/or specific numbers please feel free to message me!

Hi @Brian Garrett ,

You're going to want to talk to your lender before pulling the trigger on a new car lease. It very well could push you over. Or it might not. Only your lender with all your paperwork will be able to give you an accurate answer specific to your situation. 

You're self employed, so it wouldn't be useful to ask you for numbers... what you think you make, what the IRS thinks you make, and what the mortgage industry thinks you make, are all going to be different numbers. 

Originally posted by @Chris Mason :

Hi @Brian Garrett,

You're going to want to talk to your lender before pulling the trigger on a new car lease. It very well could push you over. Or it might not. Only your lender with all your paperwork will be able to give you an accurate answer specific to your situation. 

You're self employed, so it wouldn't be useful to ask you for numbers... what you think you make, what the IRS thinks you make, and what the mortgage industry thinks you make, are all going to be different numbers. 

Thanks Chris and yes I understand this. The issue is I don't have a lender I'm working with yet. I've sat down with 3 local banks/credit unions and I've talked to a handful more lenders here on BP but I've received contradicting information from them. Some told me I don't qualify even as is right now while others told me there shouldn't be any problem. I've been actively looking for someone who understands all the Fannie/Freddie logistics and has worked with someone in my situation before but I haven't had any luck sourcing that lender/bank/credit union yet hence why I'm posting here.

@Brian Garrett - Understanding DTI is easy. Take the average of your last two year's reported AGI and divide that by 12. For example let's say 2016 was $100k and 2017 was $140k - your average is $120k - or $10k a month. Take that times 45% and that is your max payment including debts. So in this scenario it is $4,500

A good ballpark P&I payment per month for every $100k you finance is:

FHA - $575

5% Down - $550

20% Down - $500

So, if you are planning on doing a 20% conventional loan your P&I is about $500 for every $100k you finance.  So if you lease a car at $250/mo that takes away $50k in your approval.  A $500/mo car payment = $100k less approval.  

So Assume $4,500 is your max DTI, No debts, and Taxes and Insurance are $1,000 / mo then your can have a $700k loan with the 20% down program ($4,500 - $1,000 = $3,500 / $500 = 7 * $100k)

Originally posted by @Brie Schmidt :

@Brian Garrett - Understanding DTI is easy. Take the average of your last two year's reported AGI and divide that by 12. For example let's say 2016 was $100k and 2017 was $140k - your average is $120k - or $10k a month. Take that times 45% and that is your max payment including debts. So in this scenario it is $4,500

A good ballpark P&I payment per month for every $100k you finance is:

FHA - $575

5% Down - $550

20% Down - $500

So, if you are planning on doing a 20% conventional loan your P&I is about $500 for every $100k you finance.  So if you lease a car at $250/mo that takes away $50k in your approval.  A $500/mo car payment = $100k less approval.  

Thanks for this example Brie but I already understood how DTI works and how to calculate it.

My problem is the banks/credit unions/lenders that I'm speaking with are all giving me contradicting information.

@Brian Garrett - what is the conflicting information?  It is pretty black and white.  

With 20% down if you lease a car at $250/mo that takes away $50k in your approval. A $500/mo car payment = $100k less approval. 

Originally posted by @Brie Schmidt :

@Brian Garrett - what is the conflicting information?  It is pretty black and white.  

With 20% down if you lease a car at $250/mo that takes away $50k in your approval. A $500/mo car payment = $100k less approval. 

Yes calculating DTI is black and white but apparently my particular situation is not.

That's why I said in my post you may need my specific numbers and details to understand.

I'd be happy to discuss further in detail with you via private messages if you'd like.

Originally posted by @Brian Garrett :
Originally posted by @Chris Mason:

Hi @Brian Garrett,

You're going to want to talk to your lender before pulling the trigger on a new car lease. It very well could push you over. Or it might not. Only your lender with all your paperwork will be able to give you an accurate answer specific to your situation. 

You're self employed, so it wouldn't be useful to ask you for numbers... what you think you make, what the IRS thinks you make, and what the mortgage industry thinks you make, are all going to be different numbers. 

Thanks Chris and yes I understand this. The issue is I don't have a lender I'm working with yet. I've sat down with 3 local banks/credit unions and I've talked to a handful more lenders here on BP but I've received contradicting information from them. Some told me I don't qualify even as is right now while others told me there shouldn't be any problem. I've been actively looking for someone who understands all the Fannie/Freddie logistics and has worked with someone in my situation before but I haven't had any luck sourcing that lender/bank/credit union yet hence why I'm posting here.

It's tough in these situations. Here's what you're balancing:

  • Lender A is taking the attitude of "get it under contract, we'll figure it out at that point." Which potentially means you're potentially going to waste a lot of time if A is showing you the biggest numbers. 
  • Lender B is being super thorough, and to you feels like the most difficult to work with at this point. But this one's answer is the most authoritative, most likely to close, least likely to  be wasting your time. 
  • Lender C is screwing up a calculation of your income, or something else. 

You've got to figure out who is A, who is B, and who is C. You're hiring someone to do a job!

Brian, congrats being consumer-debt free!

I'm boring but consistent. I'd buy myself a functional vehicle with cash off of Craigslist or person to person somehow. Even if your fleece I mean lease payments are low, you are renting a car. Say that out loud. I am looking to rent a car and my payments will be going against my credit. I have no other debt other than this car rental....  You get the drift. 

Buy yourself a decent Camry or minivan or whatever from a private party that is a don't wanner :) I just did that, but the car is ridiculously un-practical.  No way I'd lease though!

Originally posted by @Chris Mason :
Originally posted by @Brian Garrett:
Originally posted by @Chris Mason:

Hi @Brian Garrett,

You're going to want to talk to your lender before pulling the trigger on a new car lease. It very well could push you over. Or it might not. Only your lender with all your paperwork will be able to give you an accurate answer specific to your situation. 

You're self employed, so it wouldn't be useful to ask you for numbers... what you think you make, what the IRS thinks you make, and what the mortgage industry thinks you make, are all going to be different numbers. 

Thanks Chris and yes I understand this. The issue is I don't have a lender I'm working with yet. I've sat down with 3 local banks/credit unions and I've talked to a handful more lenders here on BP but I've received contradicting information from them. Some told me I don't qualify even as is right now while others told me there shouldn't be any problem. I've been actively looking for someone who understands all the Fannie/Freddie logistics and has worked with someone in my situation before but I haven't had any luck sourcing that lender/bank/credit union yet hence why I'm posting here.

It's tough in these situations. Here's what you're balancing:

  • Lender A is taking the attitude of "get it under contract, we'll figure it out at that point." Which potentially means you're potentially going to waste a lot of time if A is showing you the biggest numbers. 
  • Lender B is being super thorough, and to you feels like the most difficult to work with at this point. But this one's answer is the most authoritative, most likely to close, least likely to  be wasting your time. 
  • Lender C is screwing up a calculation of your income, or something else. 

You've got to figure out who is A, who is B, and who is C. You're hiring someone to do a job!

I agree with you but lenders D, E, F, G and H are all giving mixed information as well.

I guess I'll just have to keep digging until I find a lender who has experience working with people in my situation.

My situation meaning no debt, plenty of cash and great credit but low income on paper.

I have some commercial/portfolio lenders as a back-up plan but I'd obviously like to utilize conventional if possible.

@Brian Garrett the reason you may be getting differing opinions is because different lenders have different qualifications. Even though you may qualify according to Fannie Mae standards, lender overlays may cause you to not qualify for them. Speak more I depth with the lenders that told you it wasn't a problem and get a pre-approval. Then you have a pretty good idea that you have the necessary qualification.
Originally posted by @Steve Vaughan :

Brian, congrats being consumer-debt free!

I'm boring but consistent. I'd buy myself a functional vehicle with cash off of Craigslist or person to person somehow. Even if your fleece I mean lease payments are low, you are renting a car. Say that out loud. I am looking to rent a car and my payments will be going against my credit. I have no other debt other than this car rental....  You get the drift. 

Buy yourself a decent Camry or minivan or whatever from a private party that is a don't wanner :) I just did that, but the car is ridiculously un-practical.  No way I'd lease though!

Thanks Steve and I agree with you. I actually hate leasing cars and anyone who knows me would tell you I constantly preach not to lease. However this is a different circumstance since I want to have as much capital as possible for properties so it seemed like the most lucrative option in order to keep all of my cash handy since I could go and lease something brand new with $0 out of pocket. Then I started thinking maybe I should just buy something cheap to get around for the time being but then I'd have a much older car with no warranty etc. This is my current dilemma as I type this from my house with no car trying to figure out which direction to go so I can stop Ubering everywhere, lol.

Originally posted by @Jason DiClemente :
@Brian Garrett the reason you may be getting differing opinions is because different lenders have different qualifications. Even though you may qualify according to Fannie Mae standards, lender overlays may cause you to not qualify for them. Speak more I depth with the lenders that told you it wasn't a problem and get a pre-approval. Then you have a pretty good idea that you have the necessary qualification.

Thanks Jason yeah I asked about overlays but that didn't seem to be the issue and I don't want the lenders who think they might be able to do the loan to hit my credit until we're fairly certain there aren't going to be any problems. So far I'm not comfortable with the lenders I've spoken to who are simply guessing and giving "opinions" rather than facts.

If your income is "low on paper", you have a "healthy amount of cash on hand", and your primarily concerned with your DTI and future borrowing ability, then there is no scenario where leasing a car would be better than buying one outright with cash.

Originally posted by @Brian Garrett :
Originally posted by @Steve Vaughan:

Brian, congrats being consumer-debt free!

I'm boring but consistent. I'd buy myself a functional vehicle with cash off of Craigslist or person to person somehow. Even if your fleece I mean lease payments are low, you are renting a car. Say that out loud. I am looking to rent a car and my payments will be going against my credit. I have no other debt other than this car rental....  You get the drift. 

Buy yourself a decent Camry or minivan or whatever from a private party that is a don't wanner :) I just did that, but the car is ridiculously un-practical.  No way I'd lease though!

Thanks Steve and I agree with you. I actually hate leasing cars and anyone who knows me would tell you I constantly preach not to lease. However this is a different circumstance since I want to have as much capital as possible for properties so it seemed like the most lucrative option in order to keep all of my cash handy since I could go and lease something brand new with $0 out of pocket. Then I started thinking maybe I should just buy something cheap to get around for the time being but then I'd have a much older car with no warranty etc. This is my current dilemma as I type this from my house with no car trying to figure out which direction to go so I can stop Ubering everywhere, lol.

 Gotcha. Just for giggles check Craigslist for something 10 yrs old or so. Low mileage car grandma had or something. Do it for me, Brian!   Don't go to the dark side without a fight!

I survived with beaters for years and was never left on the side of the road or had huge repair bills.  Explore all options before the slimy suit has you in the back financing office of a delaership salivating and rubbing his hands together!

Originally posted by @Kyle J. :

If your income is "low on paper", you have a "healthy amount of cash on hand", and your primarily concerned with your DTI and future borrowing ability, then there is no scenario where leasing a car would be better than buying one outright with cash.

There are actually a variety of scenarios where leasing would make more sense. If not I wouldn't have considered it.

I understand your perspective though and I agree that buying something cheap with cash may be the best bet right now.

Originally posted by @Steve Vaughan :
Originally posted by @Brian Garrett:
Originally posted by @Steve Vaughan:

Brian, congrats being consumer-debt free!

I'm boring but consistent. I'd buy myself a functional vehicle with cash off of Craigslist or person to person somehow. Even if your fleece I mean lease payments are low, you are renting a car. Say that out loud. I am looking to rent a car and my payments will be going against my credit. I have no other debt other than this car rental....  You get the drift. 

Buy yourself a decent Camry or minivan or whatever from a private party that is a don't wanner :) I just did that, but the car is ridiculously un-practical.  No way I'd lease though!

Thanks Steve and I agree with you. I actually hate leasing cars and anyone who knows me would tell you I constantly preach not to lease. However this is a different circumstance since I want to have as much capital as possible for properties so it seemed like the most lucrative option in order to keep all of my cash handy since I could go and lease something brand new with $0 out of pocket. Then I started thinking maybe I should just buy something cheap to get around for the time being but then I'd have a much older car with no warranty etc. This is my current dilemma as I type this from my house with no car trying to figure out which direction to go so I can stop Ubering everywhere, lol.

 Gotcha. Just for giggles check Craigslist for something 10 yrs old or so. Low mileage car grandma had or something. Do it for me, Brian!   Don't go to the dark side without a fight!

I survived with beaters for years and was never left on the side of the road or had huge repair bills.  Explore all options before the slimy suit has you in the back financing office of a delaership salivating and rubbing his hands together!

Lol trust me I hear you. I've only leased one car my entire life and said never again! Until this dilemma came about.

@Brian Garrett Since you say you have a healthy cash balance, can you sell your vehicle after acquiring the property and then sell the car to get your cash balance back up? 

Another option could be getting a cheaper lease and pay all installments upfront .. I got a 2 year lease for $3k upfront and $0 payments ... yes I know its renting the car for 2 years and I am okay with it ... 

Maybe find a nice economical car and do a 1 payment lease? Obviously would cost some dough out of pocket but for 10k or so you can have a brand new car full warranty and no impact on your DTI.

Originally posted by @Avi Garg :

@Brian Garrett Since you say you have a healthy cash balance, can you sell your vehicle after acquiring the property and then sell the car to get your cash balance back up? 

Another option could be getting a cheaper lease and pay all installments upfront .. I got a 2 year lease for $3k upfront and $0 payments ... yes I know its renting the car for 2 years and I am okay with it ... 

Unfortunately I already sold the car so the first suggestion is not an option for me.

The second option would defeat the purpose of leasing because it would require all of the capital up front.

The reason for me wanting to lease would be to do a $0 down and low monthly payment for minimal cash outlay.

Originally posted by @Ryan Libersher :

Maybe find a nice economical car and do a 1 payment lease? Obviously would cost some dough out of pocket but for 10k or so you can have a brand new car full warranty and no impact on your DTI.

I just replied in the previous post why this won't work but I appreciate the suggestion nonetheless!

Are lenders giving you conflicting information specifically towards how a vehicle lease affects your DTI? Or just your overall qualifications?

I would tend to agree with @Brie Schmidt here. While lenders may look at other aspects of your qualifications differently, I would imagine a vehicle lease would be a fairly straight-forward part of their equation. I'm not a lender though, just an educated guess on my part.

Originally posted by @Jeremy Z. :

Are lenders giving you conflicting information specifically towards how a vehicle lease affects your DTI? Or just your overall qualifications?

I would tend to agree with @Brie Schmidt here. While lenders may look at other aspects of your qualifications differently, I would imagine a vehicle lease would be a fairly straight-forward part of their equation. I'm not a lender though, just an educated guess on my part.

No the lenders don't know anything about a lease since there isn't one at this point.

Originally posted by @Brian Garrett :
Originally posted by @Chris Mason:

Hi @Brian Garrett,

You're going to want to talk to your lender before pulling the trigger on a new car lease. It very well could push you over. Or it might not. Only your lender with all your paperwork will be able to give you an accurate answer specific to your situation. 

You're self employed, so it wouldn't be useful to ask you for numbers... what you think you make, what the IRS thinks you make, and what the mortgage industry thinks you make, are all going to be different numbers. 

Thanks Chris and yes I understand this. The issue is I don't have a lender I'm working with yet. I've sat down with 3 local banks/credit unions and I've talked to a handful more lenders here on BP but I've received contradicting information from them. Some told me I don't qualify even as is right now while others told me there shouldn't be any problem. I've been actively looking for someone who understands all the Fannie/Freddie logistics and has worked with someone in my situation before but I haven't had any luck sourcing that lender/bank/credit union yet hence why I'm posting here.

 Work with a portfolio lender and none of that matters. Show them an amazing deal, your cash reserves, and someone will take you on

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