Do lenders include your monthly car lease payment or the total amount of the car lease to calculate the debt-to-income ratio for a mortgage?
When you apply for a mortgage, the lender uses your monthly car lease payment and not your lease balance to calculate your debt-to-income ratio. For example, if your monthly car lease payment is $350 and your current lease balance is $4,000, the lender includes $350 in the debt component of your debt-to-income ratio, not $4,000. Simply add your monthly car lease payment to your total monthly debt expense to determine your debt-to-income ratio.
The same logic applies to car loan payments or really any loan for that matter. Your debt-to-income ratio is based on your monthly debt payments not your total outstanding debt balance. We should highlight that when you apply for a mortgage, a car lease payment is considered a monthly debt expense even though a lease is technically different than a loan.
Use our DEBT-TO-INCOME RATIO CALCULATOR to determine the mortgage amount you can afford
Using the lower monthly lease or loan payment as opposed to your total debt balance makes it easier to qualify for a mortgage. Lenders typically apply a maximum debt-to-income ratio of 40% to 50%, depending on the lender and the loan program, to determine the mortgage you can afford.
A debt-to-income ratio is the maximum percentage of your monthly gross income you can spend on total monthly debt expenses including your mortgage payment, property tax, homeowners insurance as well as mortgage insurance and homeowners association (HOA) dues, if applicable, plus monthly payments for credit cards and student, personal and car loans (or leases). For example, if you earn $5,000 a month in gross income and the lender applies a debt-to-income ratio of 50%, you can spend a maximum of $2,500 on monthly debt payments, including your mortgage.
Review How the Debt-to-Income Ratio for a Mortgage Works
The less you spend on non-housing related debt payments for credit cards and other loans, the more money you can spend on your mortgage and the higher the loan amount you can afford. For example, if you pay off a car lease with a $350 monthly payment before you apply for a mortgage, that payment is no longer included in your debt-to-income ratio. Although the debt-to-income ratio used by the lender does not change, you can take the money you were spending on your car lease payment and use it for your mortgage and other housing expenses instead, which increases the loan amount you qualify for.
The example below demonstrates that the less monthly debt you have, the more you can spend on your mortgage. The first scenario shows what size mortgage the borrower can afford with a $350 monthly car lease payment and $300 in other monthly debt expenses. In this case, the borrower can afford an approximately $310,000 mortgage.
Mortgage Borrower Can Afford With Car Lease Payment
Monthly Gross Income: $5,000
How Much Applicant Can Spend on Total Monthly Debt Expense: $2,500
Monthly Car Lease Payment: $350
Other Monthly Debt Payments: $300
How Much Applicant Can Spend on Mortgage and Other Housing Expense: $1,850
Mortgage Applicant Can Afford: $310,000
The scenario below shows what size mortgage the borrower can afford without the $350 monthly car lease payment. In this case, the borrower can afford a higher $365,000 mortgage because her or his monthly debt expense is lower.
Mortgage Borrower Can Afford Without Car Lease Payment
Monthly Gross Income: $5,000
Debt-to-Income Ratio: 50%
How Much Applicant Can Spend on Total Monthly Debt Expense: $2,500
Monthly Car Lease Payment: $0
Other Monthly Debt Payments: $300
How Much Applicant Can Spend on Mortgage and Other Housing Expense: $2,200
Mortgage Applicant Can Afford: $365,000
This example illustrates why if you have extra funds it may be a good idea to pay off or pay down some of your loans before you apply for a mortgage. You also need to have enough money saved for your down payment and closing costs, which can be significant, but paying down your debt balance can boost your financing capacity.
When you pay off or pay down loans it is important to keep a record of any payments you make as well as updated account statements. You can provide these documents to the lender as it may take one-to-two months for updated loan account information to appear on your credit report.
This is another reason why the sooner you payoff your debts before you apply for a mortgage, the better. Plus, this gives your credit score more time to potentially improve after reducing your debt balance.
The table below shows mortgage rates and fees for leading lenders near you. We recommend that you contact multiple lenders to understand their qualification requirements, including the debt-to-income ratio they use. Shopping lenders also enables you to find the best mortgage terms.
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It is also important to highlight that lenders treat car leases and loans differently if you have a relatively small number of payments remaining. The monthly payments on a car loan with less than eleven months remaining may be excluded from your debt-to-income ratio. Because there is a relatively short period of time remaining on the loan it is not considered an ongoing debt obligation.
With a car lease, however, lenders include the monthly payment in your debt-to-income ratio regardless of the number of payments you have remaining on the lease. This is because lenders assume you renew or take out a new lease or buy another car after your current lease expires.
The final point to keep in mind is if someone else has made the payment on a loan or lease on your behalf for the past twelve months, that payment can also be excluded from your debt-to-income ratio. For example, if your parents have paid your car lease payments completely with their own funds for at least a year, the payment is not counted as debt when you apply for a mortgage. Please note that you are required to provide documentation that verifies someone else has made the payments.
To summarize, lenders use your monthly lease or debt expense and not your total lease or loan balance to determine what size mortgage you can afford. The lower your debt payments, the higher the loan amount you qualify for.
Sources
"B3-6-02, Debt-to-Income Ratios." Selling Guide: Fannie Mae Single Family. Fannie Mae, February 5 2020. Web.
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