Leasing a new car (Conventional DTI Concerns)

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Leasing a new car (Conventional DTI Concerns)

Brian Garrett
Real Estate Investor · Palm Beach County, FL · Member since 2017 · 3k+ posts · 2k+ votes

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!

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Kyle J.
Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
8y

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.

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  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
    8y

    @Jeremy Z. and @Brian Garrett

    Let's just assume you are already under contract to close 4/1

    You lease a car today, after you have your pre-approval

    Part of your clear to close is another credit check - at which you must explain any credit pulls from the initial loan application till a day or so before closing.  You must also certify that you have not acquired new debt or a new loan during that time period.  So even if it is not a line item on your credit yet, it will come up.

    I had a client lease a Porche the day before closing and it came up. Luckily his income was high so it did not affect his DTI enough to kill the deal.

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  • Brian Garrett
    OP
    Real Estate Investor · Palm Beach County, FL · Member since 2017 · 3k+ posts · 2k+ votes
    8y
    Originally posted by @Brie Schmidt:

    @Jeremy Z. and @Brian Garrett

    Let's just assume you are already under contract to close 4/1

    You lease a car today, after you have your pre-approval

    Part of your clear to close is another credit check - at which you must explain any credit pulls from the initial loan application till a day or so before closing.  You must also certify that you have not acquired new debt or a new loan during that time period.  So even if it is not a line item on your credit yet, it will come up.

    I had a client lease a Porche the day before closing and it came up. Luckily his income was high so it did not affect his DTI enough to kill the deal.

    Correct I'm aware it would come up that's why I wanted to make this post prior to doing anything. Thanks Brie.

    0Reply
  • Jeremy Z.
    Tacoma, WA · Member since 2018 · 230 posts · 257 votes
    8y
    Originally posted by @Brian Garrett:
    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.

    Then I think it would be reasonable to assume what Brie said holds true. You replied to her saying that lenders were giving you conflicting information, but they really haven't in regards to how a lease would effect your DTI. There may be exceptions to the rule, but I think most lenders will look at a vehicle lease similarly.

    0Reply
  • Brian Garrett
    OP
    Real Estate Investor · Palm Beach County, FL · Member since 2017 · 3k+ posts · 2k+ votes
    8y
    Originally posted by @Jeremy Z.:
    Originally posted by @Brian Garrett:
    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.

    Then I think it would be reasonable to assume what Brie said holds true. You replied to her saying that lenders were giving you conflicting information, but they really haven't in regards to how a lease would effect your DTI. There may be exceptions to the rule, but I think most lenders will look at a vehicle lease similarly.

    No I never said a lender gave me conflicting information regarding how a lease would effect my DTI.

    I simply asked a question about how a lease would effect my DTI and asked if I should avoid it.

    I said lenders have been giving me contradicting information regarding Fannie/Freddie qualification.

    0Reply
  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
    8y

    It will lower your approval.  Assuming a conventional loan with 20% down a $100/mo lease will lower it by 20k.  $500/mo lease will lower it by $100k.  $362/mo lease will lower it by $724k

    Whatever the monthly lease amount is * by 200 and that is how much your approval will be reduced.  

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  • Jeremy Z.
    Tacoma, WA · Member since 2018 · 230 posts · 257 votes
    8y
    Originally posted by @Brian Garrett:
    Originally posted by @Jeremy Z.:
    Originally posted by @Brian Garrett:
    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.

    Then I think it would be reasonable to assume what Brie said holds true. You replied to her saying that lenders were giving you conflicting information, but they really haven't in regards to how a lease would effect your DTI. There may be exceptions to the rule, but I think most lenders will look at a vehicle lease similarly.

    No I never said a lender gave me conflicting information regarding how a lease would effect my DTI.

    I simply asked a question about how a lease would effect my DTI and asked if I should avoid it.

    I said lenders have been giving me contradicting information regarding Fannie/Freddie qualification.

     Yes, I was following along. I thought Brie gave a pretty good response and you appeared to dismiss it, at least initially.

    If you have some particular purchases or refinances in mind you can probably do the math or speak to a lender and determine if a vehicle lease will be a deal breaker.  If it is, consider purchasing a cheap reliable vehicle until you have your financing in place, then lease the vehicle you really want.  Good luck!

    1Reply
  • Brian Garrett
    OP
    Real Estate Investor · Palm Beach County, FL · Member since 2017 · 3k+ posts · 2k+ votes
    8y
    Originally posted by @Jeremy Z.:
    Originally posted by @Brian Garrett:
    Originally posted by @Jeremy Z.:
    Originally posted by @Brian Garrett:
    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.

    Then I think it would be reasonable to assume what Brie said holds true. You replied to her saying that lenders were giving you conflicting information, but they really haven't in regards to how a lease would effect your DTI. There may be exceptions to the rule, but I think most lenders will look at a vehicle lease similarly.

    No I never said a lender gave me conflicting information regarding how a lease would effect my DTI.

    I simply asked a question about how a lease would effect my DTI and asked if I should avoid it.

    I said lenders have been giving me contradicting information regarding Fannie/Freddie qualification.

     Yes, I was following along. I thought Brie gave a pretty good response and you appeared to dismiss it, at least initially.

    If you have some particular purchases or refinances in mind you can probably do the math or speak to a lender and determine if a vehicle lease will be a deal breaker.  If it is, consider purchasing a cheap reliable vehicle until you have your financing in place, then lease the vehicle you really want.  Good luck!

    Once again you are incorrect so apparently you haven't followed along too closely. Best of luck to you.

    0Reply
  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
    8y

    @Jeremy Z. - As someone who owns 90+ units myself and is one of the top 10% of agents in Chicago who only works with investor clients.  I am involved in tens of millions of dollars a year in transactions.  I literally spend my day in yoga pants reviewing deals with investors and banks.  My answer is right, it is just not the one he wants to hear 

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  • Brian Garrett
    OP
    Real Estate Investor · Palm Beach County, FL · Member since 2017 · 3k+ posts · 2k+ votes
    8y
    Originally posted by @Brie Schmidt:

    @Jeremy Z. - As someone who owns 90+ units myself and is one of the top 10% of agents in Chicago who only works with investor clients.  I am involved in tens of millions of dollars a year in transactions.  I literally spend my day in yoga pants reviewing deals with investors and banks.  My answer is right, it is just not the one he wants to hear

    Lol at you trying to brag about yourself in my post. Please message him directly to have irrelevant conversation. 

    0Reply
  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
    8y

    @Brian Garrett - I am someone with experience.  I am not trying to brag, I am a very small investor compared to many on here.  But I have been doing this day in and day out for years.  You asked a question, I gave you the answer.  

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  • Brian Garrett
    OP
    Real Estate Investor · Palm Beach County, FL · Member since 2017 · 3k+ posts · 2k+ votes
    8y
    Originally posted by @Brie Schmidt:

    @Brian Garrett - I am someone with experience.  I am not trying to brag, I am a very small investor compared to many on here.  But I have been doing this day in and day out for years.  You asked a question, I gave you the answer.  

    That's great I'm happy for you but unfortunately your answer explaining how to calculate DTI was not needed.

    P.S. We were already talking in PM's so feel free to continue this conversation there if you feel the need to.

    0Reply
  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
    8y

    @Brian Garrett - it does though.  Person A makes $20,000 a month.  Person B Makes $2,000 a month.  

    With a residential loan, if they both go lease a car tomorrow for $250 a month it will lower both of their approvals by $50k.  It doesn't matter what the income is, both will have lower approvals.  

    A 30 year fixed loan at 4.3875% for $100k = $500.02 a month in payments.  

    Regardless if you take out a loan for $25 a month or $2000 a month - both will reduce the amount in your DTI thus lowering your approval. $25/ mo = $5000 less approval and $2,000/mo = $400k less approval.

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  • Jeremy Z.
    Tacoma, WA · Member since 2018 · 230 posts · 257 votes
    8y
    Originally posted by @Brian Garrett:
    Originally posted by @Jeremy Z.:
    Originally posted by @Brian Garrett:
    Originally posted by @Jeremy Z.:
    Originally posted by @Brian Garrett:
    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.

    Then I think it would be reasonable to assume what Brie said holds true. You replied to her saying that lenders were giving you conflicting information, but they really haven't in regards to how a lease would effect your DTI. There may be exceptions to the rule, but I think most lenders will look at a vehicle lease similarly.

    No I never said a lender gave me conflicting information regarding how a lease would effect my DTI.

    I simply asked a question about how a lease would effect my DTI and asked if I should avoid it.

    I said lenders have been giving me contradicting information regarding Fannie/Freddie qualification.

     Yes, I was following along. I thought Brie gave a pretty good response and you appeared to dismiss it, at least initially.

    If you have some particular purchases or refinances in mind you can probably do the math or speak to a lender and determine if a vehicle lease will be a deal breaker.  If it is, consider purchasing a cheap reliable vehicle until you have your financing in place, then lease the vehicle you really want.  Good luck!

    Once again you are incorrect so apparently you haven't followed along too closely. Best of luck to you.

     Still trying to figure out where I was incorrect. I never claimed you said lenders were giving you contradicting information about a vehicle lease and DTI. You kept bring up contradicting info from lenders (in general terms) and I am pointing out that in regards to your original post about a vehicle lease and DTI, I think the other specifics of your situation are probably irrelevant. The lease will be looked at similarly by all those lenders, even if they look at other factors differently.

    I've got no reason to argue with you and no horse in this race. If you are concerned about purchasing power the vehicle lease is bound to hurt more than a cheap reliable vehicle that you own outright.

    0Reply
  • Brian Garrett
    OP
    Real Estate Investor · Palm Beach County, FL · Member since 2017 · 3k+ posts · 2k+ votes
    8y
    Originally posted by @Brie Schmidt:

    @Brian Garrett - it does though.  Person A makes $20,000 a month.  Person B Makes $2,000 a month.  

    With a residential loan, if they both go lease a car tomorrow for $250 a month it will lower both of their approvals by $50k.  It doesn't matter what the income is, both will have lower approvals.  

    A 30 year fixed loan at 4.3875% for $100k = $500.02 a month in payments.  

    Regardless if you take out a loan for $25 a month or $2000 a month - both will reduce the amount in your DTI thus lowering your approval. $25/ mo = $5000 less approval and $2,000/mo = $400k less approval.

    Yes I'm already aware of all this. This is not helpful nor useful information for me.

    0Reply
  • Brian Garrett
    OP
    Real Estate Investor · Palm Beach County, FL · Member since 2017 · 3k+ posts · 2k+ votes
    8y
    Originally posted by @Jeremy Z.:
    Originally posted by @Brian Garrett:
    Originally posted by @Jeremy Z.:
    Originally posted by @Brian Garrett:
    Originally posted by @Jeremy Z.:
    Originally posted by @Brian Garrett:
    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.

    Then I think it would be reasonable to assume what Brie said holds true. You replied to her saying that lenders were giving you conflicting information, but they really haven't in regards to how a lease would effect your DTI. There may be exceptions to the rule, but I think most lenders will look at a vehicle lease similarly.

    No I never said a lender gave me conflicting information regarding how a lease would effect my DTI.

    I simply asked a question about how a lease would effect my DTI and asked if I should avoid it.

    I said lenders have been giving me contradicting information regarding Fannie/Freddie qualification.

     Yes, I was following along. I thought Brie gave a pretty good response and you appeared to dismiss it, at least initially.

    If you have some particular purchases or refinances in mind you can probably do the math or speak to a lender and determine if a vehicle lease will be a deal breaker.  If it is, consider purchasing a cheap reliable vehicle until you have your financing in place, then lease the vehicle you really want.  Good luck!

    Once again you are incorrect so apparently you haven't followed along too closely. Best of luck to you.

     Still trying to figure out where I was incorrect. I never claimed you said lenders were giving you contradicting information about a vehicle lease and DTI. You kept bring up contradicting info from lenders (in general terms) and I am pointing out that in regards to your original post about a vehicle lease and DTI concerns, I think the other specifics of your situation are probably irrelevant. The lease will be looked at similarly by all those lenders, even if they look at other factors differently.

    I've got no reason to argue with you and no horse in this race. If you are concerned about purchasing power the vehicle lease is bound to hurt more than a cheap reliable vehicle that you own outright.

    Thanks for your opinion but I'm well aware how DTI works and never said otherwise. Best of luck to you.

    0Reply
  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
    8y

    Then why ask the question if a car lease will effect your approval?  

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  • Jason D.
    Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
    8y
    @Brian Garrett having multiple credit pulls by mortgage lenders in a short period of time won't negatively impact your score. It will only count as 1 inquiry on you credit report. If there are 3 lenders that think they can get you approved, have them get you pre approved. The only other option is don't, which isn't going to help you buy property. You're going to continue to get conflicting opinions, which will continue to paralyze your purchase, until you take action.
    0Reply
  • Brian Garrett
    OP
    Real Estate Investor · Palm Beach County, FL · Member since 2017 · 3k+ posts · 2k+ votes
    8y
    Originally posted by @Brie Schmidt:

    Then why ask the question if a car lease will effect your approval?  

    I think you may be confused and might want to go back to the original post and read it again.

    Here's my question verbatim:

    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?

    Where does that question say that I need an explanation of how DTI works or how to do math?

    If anything me acknowledging it will negatively impact my DTI implies I'm already aware of that.

    I'm not sure where the math class on calculating DTI came from but I already understood all of that.

    0Reply
  • Brian Garrett
    OP
    Real Estate Investor · Palm Beach County, FL · Member since 2017 · 3k+ posts · 2k+ votes
    8y
    Originally posted by @Jason D.:
    @Brian Garrett having multiple credit pulls by mortgage lenders in a short period of time won't negatively impact your score. It will only count as 1 inquiry on you credit report. If there are 3 lenders that think they can get you approved, have them get you pre approved. The only other option is don't, which isn't going to help you buy property. You're going to continue to get conflicting opinions, which will continue to paralyze your purchase, until you take action.

    Do you know how long they give you to shop lenders where it will only count as 1 inquiry on the credit report?

    0Reply
  • Eric C.
    Investor · Grand Junction, CO · Member since 2017 · 207 posts · 201 votes
    8y

    It sounds like you have made up your mind to make a poor financial decision to lease a car and you are looking for someone to tell you to go forward with your decision.  So with that, let me say go forward with the lease.  given that each $50 dollar in lease reduces your purchasing power by $10k , whereas at 20% down you would have to spend $2000 to get that same reduction in purchasing power. 

    0Reply
  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
    8y

    @Brian Garrett - Leasing a car will lower your DTI. If your DTI is already tight and you do not want to lower your approval your only option is buying the car in cash.

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  • Jeremy Z.
    Tacoma, WA · Member since 2018 · 230 posts · 257 votes
    8y

    Ok, I'll try a different approach here...

    Probably. Owning a cheap vehicle will maximize your buying power. Only you can decide if that is your highest priority, or if a decrease in your spending power due to a lease is worth it for you.

    0Reply
  • Brian Garrett
    OP
    Real Estate Investor · Palm Beach County, FL · Member since 2017 · 3k+ posts · 2k+ votes
    8y
    Originally posted by @Eric C.:

    It sounds like you have made up your mind to make a poor financial decision to lease a car and you are looking for someone to tell you to go forward with your decision.  So with that, let me say go forward with the lease.  given that each $50 dollar in lease reduces your purchasing power by $10k , whereas at 20% down you would have to spend $2000 to get that same reduction in purchasing power. 

    No that's not the case at all. My mind was never made up to lease. I was 50/50 which is why I posted about it.

    I said it just seemed like the most logical way of keeping all of my cash since I could do $0 down with a lease.

    If I buy something older outright then I have that cash outlay which is what I was trying to avoid if possible.

    0Reply
  • Mark Robert
    Rental Property Investor · West New York, NJ · Member since 2015 · 27 posts · 7 votes
    8y

    @Brian Garrett

    Going back to your OP it seemed to me your main concern was saving money to invest in RE deals. 

    Getting into a lease isn't going to help your DTI as discussed in previous posts and is also a costly option in general when factoring insurance, fees, etc... I like your idea of purchasing something decent for cash. This will provide you with the best bang for your buck.

    With that being said you may want to consider speaking with your tax preparer. From what I understand leasing a vehicle when self-employed can have some nice tax benefits. 

    1Reply
  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
    8y

    You need cash for the down payment, reserves, and closing costs.  Outside of that, how much cash you have has no impact on what you are approved for.  

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