Will Leasing a Car Ruin Your Chances of Buying a Home? Maybe—Here’s Why
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Buying a home of your very own is a dream. For most people to make that dream a reality, they’ll have to get approved for a home loan. To up your chances of being approved—at a favorable rate—it’s always smart to pay down debts or pay off existing loans to the best of your ability. But one common thing that can mess with your homebuying plans is having a car lease.
“Whether you choose to lease or finance a car, you’ll increase your total monthly expenses. However, mortgage lenders view leasing and financing a car differently,” says Ashley Moore, community lending manager at Chase Home Lending.
If you have your eyes on a new house—and also a nice ride—you should understand exactly how carrying a lease will affect your buying power. Here’s what you need to know.
What do lenders generally look at?
Lenders calculate your debt-to-income ratio, or DTI, which is a person’s monthly debt payments divided by gross monthly income. Lenders look at your DTI to measure your ability to handle monthly payments to repay money you will borrow.
When evaluating a mortgage application, lenders will review several factors like credit score, debt-to-income ratio, and intended down payment. Most lenders prefer a DTI lower than 36%; a DTI of 43% is typically the highest a borrower can have and still qualify for a mortgage.
“For example, if a potential buyer makes $120,000 per year, that is equivalent to $10,000 per month in gross earnings,” says Moore. “Therefore, a client with this scenario can usually qualify to spend up to $4,300 per month for all expenses appearing on the credit report, not just housing.”
Does leasing a car hurt your chances of buying a home?
Mortgage lenders view car leases similarly to rent: Each month you make payments, but that does not increase your total equity in the car. At the end of the lease agreement, a person can either purchase the car being leased, or lease or purchase another car.
“When you finance a car, each monthly payment brings you closer to owning the car outright. Once you pay off a financed loan, a car that you own outright is viewed as an asset by mortgage lenders and can help to strengthen your mortgage application,” says Moore.
To improve your DTI, some mortgage lenders may even allow you to exclude an installment loan (e.g., a car loan or a student loan) during the mortgage approval process if you have 10 or fewer payments to make.
However, that’s not the case if you lease a car.
“You cannot pay off the lease either to exclude the payment,” says Melissa Cohn, a mortgage banker for William Raveis Mortgage. “The only exception would be if you could provide a letter explaining that you are not going to lease a car again. Then your lender may let you exclude it.”
What to do if you lease a car and want to buy a home
If you’re planning to—or currently—lease a car, Moore says there are a few options to help you qualify for the highest possible mortgage amount.
“The first option is to complete your car lease term prior to applying for a mortgage or to wait to lease a car until after you’ve closed on your home,” says Moore. “This will ensure the lease is not considered in your DTI calculation.”
If the lease is paid off before applying for a mortgage, lenders might ask for documentation to prove the car was returned or financed at the close of the lease, Moore says.
For those who have already leased a car and have remaining payments, they can reduce their mortgage loan to lower their expected monthly payments.
“Depending on how much is still owed, some borrowers may choose to try to end their lease early or transfer the lease to someone else in order to remove debt obligation,” says Moore. “Work with a trusted home lending adviser to determine how debt, like a car loan or lease, may impact your mortgage qualifications and what options may be available to you.”
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