The Car vs House Chart

The guide in brief

Car payments and your home loan: the guide in brief

Here is a plain summary of the main points in The Car vs House Chart. The full guide adds the chart itself, which lays out illustrative examples by salary and by car payment. Every figure in it is an illustration built on stated assumptions, not a quote and not a commitment to lend. What it gives you is the shape of the tradeoff, so you can see it before a lender runs your file.

How a lender reads your monthly budget

When a lender sizes a home loan, it compares your monthly debt payments, including the new housing payment, with your gross monthly income. Every fixed monthly payment you already carry claims part of that budget: student loans, credit cards, and very often a car. After housing itself, a car payment is frequently the biggest piece. Whatever the car takes, the housing payment cannot use.

Why a small payment has a long reach

A mortgage is repaid over many years, so each dollar of monthly payment supports many dollars of loan. That is why a car payment that feels modest month to month can shrink the home loan that fits the same budget by far more than the car itself costs. The lever is small at one end and long at the other. The chart in the guide shows this row by row: find your salary, read across to your payment, and compare it with the column for no car payment at all. The gap between the two is what the car is costing your home budget.

Paying the car off before you apply

It sounds like the obvious fix, and sometimes it is. But the guide asks two questions first.

• Will you still have savings left after closing? Lenders look at the money you have for the down payment, the closing costs and the reserves you keep afterwards. A payoff that empties your accounts right before you apply can hurt your file more than the payment did.
• How close are you to applying? The further away you are, the more a payoff tends to help, because you have time to rebuild your savings. Close to applying, talk to your lender before you move any money, because the order in which you do things can matter as much as the arithmetic.

When the car is the right call

This is not an anti-car guide. If the car gets you to work, or the payment is small against your income, it may cost you nothing you care about. The point is to sign both contracts with your eyes open. The car dealer will not show you what the payment does to your home budget, so the guide does.

Questions to ask any lender, including us

A good conversation about your debts sounds like this:

• Which of my monthly payments counted against my budget?
• How much room is left before the next payment would change the loan amount that fits?
• If I paid one debt off, how would that change things, and would you rather I kept that cash in savings?

A lender who answers those plainly, with your own file in front of them, is a lender you can work with.

To see what a housing payment looks like at a price you have in mind, try the mortgage payment calculator, or read our home purchase loans page for the programs that fit first-time and move-up buyers, the documents to gather and the steps to closing.