A car payment counts against a mortgage dollar for dollar, because lenders add it to your house payment when they figure your debt-to-income ratio (DTI): the house payment plus monthly debts, divided by gross monthly income before taxes. What it does to your price depends on its size and the program. On FHA, a modest car payment often costs you nothing at all.
How a car payment enters the math
Lenders take the monthly payment from your credit report. The balance doesn't matter, and neither does what you pay for insurance or gas.
FHA has two limits with an automated approval. The house payment alone can be up to 46.9% of gross income (the front-end ratio), and the house payment plus all debts can be up to 56.9% (the back-end ratio). That 10-point gap is room for debts. As long as your car payment and other debts add up to less than 10% of your income, the housing limit is what caps your FHA price, and the car payment doesn't lower it.
Conventional loans approved through Fannie Mae's Desktop Underwriter use a single 50% total limit with no separate housing limit. There, every dollar of car payment comes straight out of the house payment you can carry.
What a car payment does to the price
Take one buyer earning $5,000 a month gross, with $110 a month in credit card minimums. The FHA prices use FHA 100% financing (a 96.5% FHA first mortgage plus a down payment assistance second covering the 3.5%) at a 5.75% rate on a 30-year fixed, property tax at 0.95% of the price a year, $283 a month for insurance and annual FHA mortgage insurance.
| Car payment | Total monthly debts | Most house payment on FHA | Most house payment on Conventional | Highest FHA price |
|---|---|---|---|---|
| $0 | $110 | $2,345 | $2,390 | $296,000 |
| $300 | $410 | $2,345 | $2,090 | $296,000 |
| $525 | $635 | $2,210 | $1,865 | $276,000 |
| $750 | $860 | $1,985 | $1,640 | $244,000 |
The FHA column comes from two checks. The housing limit is 46.9% of $5,000, or $2,345. The total limit is 56.9% of $5,000, or $2,845, minus the debts. With a $525 car payment, $2,845 minus $635 leaves $2,210, which is lower than $2,345, so total debt becomes the limit and the price drops to $276,000. The Conventional column is 50% of $5,000, or $2,500, minus the debts.
The $300 car payment costs this buyer nothing on FHA, because $410 in total debts is under 10% of income. Past that point, each extra $100 a month removes about $14,000 of FHA buying power at a 5.75% rate.
Car loans that are almost paid off
A car loan near its end can drop out of the math. Fannie Mae counts an installment debt only when more than 10 monthly payments remain, unless the payment is large enough to strain the budget, and it allows the loan to be paid down to 10 or fewer payments before or at closing. FHA leaves out a closed-end debt that will be paid off within 10 months when those payments together are no more than 5% of gross monthly income, and FHA doesn't let you pay a loan down to reach the 10-month mark.
Say the $525 car loan has a $7,350 balance, which is 14 payments. Paying $2,100 brings the balance to $5,250, or 10 payments, and on a Conventional loan the lender can leave it out. On FHA it stays in, because the $525 is 10.5% of $5,000, above the 5% line, and a pay-down doesn't count there anyway. A car lease counts on Fannie Mae no matter how few months are left.
Ways to win back buying power
Pay off the car or pay it down. Removing a $525 payment moves this buyer from $276,000 back to the $296,000 housing limit on FHA, and adds $525 a month of room on Conventional.
Add a co-signer. A parent or grandparent can co-sign, even on Social Security or SSI, and their income counts with yours. A co-signer doesn't go on the title and doesn't have to live in the home. The co-signer calculator shows what one adds.
Show who's paying. If someone else is also on the car loan and has made every payment from their own account for the last 12 months, FHA and Fannie Mae let the lender leave it out with that person's bank statements.
Wait on the new car. A car bought while your loan is in process adds a payment the lender didn't approve, so shop for it after closing.
The home page calculator takes your income, car payment and other debts and shows your highest price on FHA, Conventional, VA and USDA side by side. If the car payment is what stands between you and the house you want, call AAA Capital Funding at 888-601-8344. We'll figure out whether a pay-down, a payoff or a co-signer gets you there fastest.