New car, hard to get conventional loan for first time home?

11 Replies

Hi all,

My girlfriend and I just got a new car- she makes the payments and we put it in my name due to my pretty good credit (hers is currently pretty bad). My question is: My dad freaked out when we bought it because he doesn't think now I'll be able to buy a home the conventional way until this car loan is paid off. What do you all think? We're currently renting but do want our own house eventually, maybe a house hack or BRRRR I've been reading about? I've never bought a new car (and obviously home) and right now my dad is causing me a great deal of anxiety, love your opinions.

one part of a banks decision to give you a loan is to look at your DTI, or debt to income ratio. basically, total monthly debt payments divided by your monthly income, gives you a percentage of how much of your income goes to other debts. if you make $4,000 per month, and your only debt is a $400 car payment, that's 10% DTI ratio. very good to the bank. that means you have 90% of your income to use to buy a house. under this scenario, if you wanted to take on a $1000 mortgage payment the bank is likely to give it to you because you still have available income to use on the mortgage. if you only make $1000 per month, that $400 car payment is now 40% of your debt and the bank will likely not give you a loan.

now with your scenario, if the new car payment (which looks like your to the bank because you are on the hook) puts your DTI too high for the bank to offer you a loan, you will be denied. if the new loan is only a small part of your income, it may not effect you. for what its worth, I purchased my first primary with a $430 monthly car loan and the mortgage broker didn't bat an eye.

@Andrew B. that is great to know, thanks! Although the car is under my name, it's mainly my girlfriend's car, and she is making the payments (her banking account is set up with the loan). Would a bank still look at DTI- if it's her that is making the payment?

Originally posted by @Doug Phillips :

@Andrew Boettcher that is great to know, thanks! Although the car is under my name, it's mainly my girlfriend's car, and she is making the payments (her banking account is set up with the loan). Would a bank still look at DTI- if it's her that is making the payment?

 they would consider it because if your girlfriend stopped making payments, you would legally be on the hook. if you were on the edge of being accepted and being not accepted, you may be able to convince a smaller bank that its her car and shouldn't count. this is unlikely tho, and I wouldn't count on it.

@Doug Phillips if your dad isn't an underwriter or loan officer or something I wouldn't put a lot of stock in what he is saying. Most people only buy a few houses in their life and really don't know as much about it as they think. If you want to know if you could buy a house just call a bank and tell them you want to get pre approved. Go through that process and you'll know. You don't have to buy something if they do pre approve you.

@Matt P. That is true also- he lent me his opinion on an insurance policy regarding the car, and he turned out to be completely wrong on that.  Sometimes you've to block negative things out I suppose;  thanks again.

@Doug Phillips WELL Let’s look at real numbers to find out if dear old dad has reason for concern . What is your monthly income and what payments do you have going out . Cars are consumer debt . That is bad debt because it’s a liability not an asset . That car isn’t going to help your chances that’s for sure

Well, we don't actually need your payment and income, just the ratio. If the total of all your debt including this car payment is under 8% of your gross monthly income this won't have much effect on your ability to borrow for a primary residence. If its over 8%, yes, that will reduce your ability to qualify for a loan by the amount over 8%. Typically lenders want your total PITI to be under 28% of your gross income, and total debt to be under 36%. But this can depend on your credit score. Have a look at the Fannie Mae Eligibility Matrix for details.  Page 4 shows DTIs and credit score requirements.

Doesn't matter that your girlfriend makes the payments. Your name is on the loan.

House hack with FHA loan on multi family which you rent out the other units and live for free. Look for a private money lender to fund your rehab and refinance out after 6 months and repeat. Much easier said than done but if you can save up 3.5% for a down payment and some rehab you can make it work.

As the others have stated the car loan will definitely be counted in the DTI as it’s legally in your name. It’s not like a credit card where you’re an authorized buyer. Some lenders will disregard that if the payments aren’t coming from your bank account.

Just try to be as frugal as possible and redirect those savings for your down payment. Your dad may be angry now but he’ll get over it eventually. It will obviously help if you get a 2-4 unit and pull off the above.

Good luck!

Chris

@Chris Tabanico I think this is the course of action I'd like to do;  I first heard about this method back in January and this seems like the best way to go given my situation.  Thanks Chris, do you mind if I PM you more about this?