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Do Lenders Use Lease Payment or Balance for Mortgage?

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?

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru

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 41% 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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Current Mortgage Rates as of October 17, 2019
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  • Rate
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View All Lenders

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Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. Click for more information on rates and product details.

It is also important to highlight that monthly payments for loans and car leases with less than six months remaining may be excluded from your debt-to-income ratio. From the lender’s standpoint, because there is a relatively short period of time remaining on these loans they are not considered ongoing debt obligations.

Additionally, 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

Debt-to-Income Ratio Guidelines: https://www.fanniemae.com/content/guide/selling/b3/6/02.html

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About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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