Does Leasing a Car Affect a Buyer’s Ability to Buy a Home?

Does leasing a car affect a buyer’s ability to buy a home? As a mortgage professional for almost 20 years, I know just about every gotcha that can cause an underwriter to deny your loan. We look at a borrower’s monthly minimum obligations paid on debts. We take those minimum payments, including your proposed total mortgage payment (principal, interest, taxes, insurance, and private mortgage insurance). Then we divide this by your gross income. This debt-to-income ratio is the barometer we use to determine your ability to repay the mortgage.

My wife, a college professor, texted me yesterday: “My friend, who is a business/finance professor and contract attorney, is insisting that leasing a car will not affect buying a home because it’s not debt … He says he also teaches mortgage people this stuff.”

WIFE: “Can I tell him he’s wrong?”

ME: “Yes, he’s wrong. It’s debt!” 

WIFE: “LOL, I knew it! He is generally full of crap, but when he said that’s what he teaches in his classes, it made me pause.”

Imagine you have a $375/month car payment, which is nearly equivalent to $75,000 in spending power when buying a home. Or, imagine you are a two-car family spending $750/month on car loans. This would reduce your buying power by $150,000. So instead of affording that charming $500,000 home you have had your eye on, your max is only $350,000. As my clients know too well, this could hinder getting into that perfect neighborhood with the right schools. Also, the short commute you so desperately want, it may no longer be in reach.

Here is the rub — a leased vehicle is even worse. Are you listening, Mr. Professor? Most of us know that when your lease period expires, you either lease again or keep the leased vehicle with a hefty buyout (this could be money you need for your down payment or closing costs for a new home). Whereas, with a conventional car loan, when you make your last scheduled payment, you own the car free and clear (a/k/a: no debt).

Also, in some circumstances, if you are a few months shy of paying off your auto loan, an underwriter will not hit you with the monthly auto debt and will not hold it against your ratios. You can see why the hair on the back of my neck jumped to attention upon hearing this professor tell his many students that a car lease is not debt and will not affect their ability to buy a home. Rubbish!

This one financial decision can be the reason you miss that opportunity to get into your dream home. When something sounds too good to be true, it genuinely is too good to be true. My best advice is to sit down with a trusted mortgage professional. Talk first before paying off any debt or restructuring those credit card balances. Next, work through your debt-to-income ratios with someone who does this every day. So, does leasing a car affect a buyer’s ability to buy a home? YES, it absolutely can.

— Dan Tharp

If you have loan questions or need to be pre-qualified please call our expert loan officer, Dan Tharp with Guild Mortgage. NMLS # 3274, Equal Housing Lender. He can be reached at 916-257-1470. Dan wrote this blog for us and he did a great job, thank you, Dan.

Weintraub & Wallace Realtors, JaCi Wallace, RE/MAX Gold 916-233-6759