Car purchase and how it affects my financing for rei

General Real Estate Investing
1

Ok so, I NEED a new/used car because my $1000 used 97 rodeo is on it last legs. :slight_smile:

Let me start by saying I have money in the bank and can more than afford a car note. Also, if I get a car, it will be the only debt I currently have other than a personal house mortgage. My question is if I take a loan out on a car will it be just as easy for me to get approved for conventional/hard money when it comes time for me to finance an investment if I have good income and money in the bank for down payment? My credit is at about 700…

I just want to make sure that if I have a car note that I should still be able to get approved for financing. I don’t think it should be an issue, but DON’T WANT to end up buying a replacement car and then have a hard time getting financed in a real estate situation because of a stupid car…

Thanks

2

Having an additional debt which you pay on promptly can help your credit. However if that debt puts you income to debt ratios out of whack it could hurt you.

I would talk to a good loan officer and have him explain the ratios and see if it is likely to affect you in your specific situation.

3

Thanks for the quick response! In all honesty, I have a pretty decent amount EXTRA each month (which goes to saving’s and extra on mortgage). If I get a new car, I don’t think it would make my debt unmanageable… Is that what you’re saying? Make sure my debt isn’t to high basically?? What amount of debt can I have before it starts affecting my ability to get qualified for conventional/hard money?

4

I checked on debt-to-income (DTI) ratios with our bank before our recent home purchase. They acted like up to 41% was no problem and anything after that they would just have to review. We found out after we were approved for our mortgage that they calculated our debts including a nearly $750/mo auto loan that was actually paid off. We still got the house we wanted, but promptly contacted the credit bureaus and lender that held the auto loan to get that fixed. From what I’ve seen, up to about 41-43% DTI is pretty standard. If you get beyond that, you may have some problems.

5

Ok so for example…if I have a mortgage payment that is $500 and my monthly income is $2000 my “debt to income” ratio is 25%??

6

That’s correct. Are you looking at SFHs or multi-family units for investment?

7

I’m looking at single and multi family…so far mostly what I’ve looked at has been single family and duplexes that are under 100k.

8

ballgum,

I don’t think you understand how debt to income ratios are computed.

All the lenders I have ever dealt with used gross income, not take home, in the calculations. The debt to income ratio equation is simply monthly fixed expenses divided by gross monthly income (before taxes and deductions).

Monthly fixed expenses include all debt, such as house payment or rent, COA/HOA fees, PMI, minimum payments on credit card and other revolving credit balances; car payments, alimony, child support, etc. Do not include grocery, telephone, and utility bills or any debt that will be paid off in the next few months. If your car loan will be paid off two or three months from now, it is not included in the equation.

Now you know how the debt to income ratio is calculated. The lender will look at your debt to income ratio as a quick and dirty estimate of the percentage of your income that is available for a mortgage payment after all other continuing obligations are met.

You may see conventional loan debt limits referred to as the 28/36 qualifying ratio. Those numbers refer to two percentages that are used to examine two aspects of your debt load – your housing expense ratio and your “total debt” to income ratio.

The first number – 28% – indicates the maximum percentage of your monthly gross income that the lender allows for just your primary housing expense. This ratio is the total of your primary housing expenses divided by your gross monthly income. Only include payments for the mortgage loan principal and interest, private mortgage insurance, hazard insurance, property taxes, and homeowner’s association dues as your housing expenses.

The second number – 36% – refers to the maximum percentage of your monthly gross income that the lender allows for housing expenses plus recurring debt – your “total debt”. Recurring debt includes the minimum monthly payment on your credit cards, child support, car loans, and any other recurring obligations that will not be paid off within a relatively short period of time (6-11 months). This second number is what is generally called the debt-to-income ratio (DTI).

Not all loans are the same. Conventional loan ratios are generally 28/36. FHA loan ratios are a little more generous, 29/41. VA loans allow a maximum debt to income ratio of 41. Since you are asking about an investment property purchase, the VA and FHA ratios won’t apply. You will have to work within the more conservative conventional loan ratios of 28% and 36%.

Lenders used to allow a DTI as high as 54% for borrowers with a high net worth and lots of verifiable liquid assets. In our current mortgage environment, lenders are tightening up their standards and not generally allowing exceptions to the 28/36 ratios. This will be especially true after December 1, 2008 for borrowers who want to use a Fannie Mae conforming loan for an investment property purchase. That is when Fannie Mae puts their new desktop underwriting rules in effect.

Now that you know that there are really two ratios (a housing expense ratio and a total debt to income ratio), you can compute your own ratios to determine how a car payment will affect your DTI. If your DTI is higher than 36%, you may need other mitigating factors in your financial statement to get an investment property loan from a portfolio lender.

9

Awesome explanation!! Thank you.

At 28/36:
So basically to compute DTI, I should get the total for house expense (mortgage, hoa, taxes, insurance, etc) + recurring debt (credit cards, car loan, etc.). So in my case I don’t think I have any recurring debt (no credit card debt, car loans, child support). Do I need to add in auto insurance, house bills to recurring debt? It seems that NO since they CAN be terminated?

If house expense + recurring debt is less than 36% I can basically just add in a car payment up until the 36% to get the max I can pay for a monthly car payment correct?

10

This is EXACTLY where 99% of Americans screw up.

BUYING THEIR CARS!!!

I owned a used car dealership for over 15 years. I sold exclusively Hondas and Toyotas. I know this business like the back of my hand.
Here’s some free advice for your car purchase…

DO NOT…let me repeat that…DO NOT buy a car from a dealer!!
You could send Donald Trump in to negotiate the deal and you would still get screwed compared to buying a car from a private party.

Buying a car is a BIG purchase, even a used car can cost you tens of thousands of dollars. Buy your cars the way you buy your Real Estate…from people who don’t know what they have!!!

Blowing this little lesson off will cost you HUNDREDS OF THOUSANDS of dollars over your lifetime!!! I have found in my experience that most Americans screw up the 2 biggest purchases they will ever make. Their home is the first one, their car is the second. Unfortunately for them BOTH of these items are usually purchased with LOANS. CARS are a depreciating asset. You should NEVER borrow money to buy a asset that will guarantee FALL in value.

So how do you find a GREAT deal on a used car???

Here’s a little tip that CAN, if actually DONE save you a FORTUNE over your lifetime. Get some orange paper. Feed it into you computer printer and type in the following…

IF THIS Repeat in this column Repeat in this column

CAR IS

FOR SALE

PLEASE

CALL ME

AT

555-5555

You now have an orange piece of paper with that phrase written in three columns. Cut the columns into 3 separate pieces. what you now have is diabolically brillant!!! When placed under the windshield wiper of the car you want to buy it looks EXACTLY like a TICKET handed out by your local police. Starting to see the light??

The key to this is picking out a specific car that you want and keeping a few dozen of these in your old car at alll times. Every time you see the car you want put one under the wiper.

It’s a NUMBERS GAME!!!

You politely explain to the people who call you that you have xxxx amount of money to buy their car and if they would consider selling it you are a cash buyer. There is ABSOLUTELY NO REASON to BORROW MONEY for a car. I have purchased INCREDIBLY RELIABLE, GREAT LOOKING USED CARS for under $3000 on the WEEKLY basis!!! If you do this right you can EASILY drive that car for a year or two and sell it for AT LEAST what you paid for it. This works on ALL makes and models of cars. I have a 1989 PORSCHE 911 TURBO that I bought using this very method. I have owned this car for 5 years and it has INCREASED in value EVERY SINGLE YEAR. I have purchased Mercedes, Lexus, Toyota, Honda, Jags, almost anything you could think of. I get calls all the time from this method. I’ve been out of the car business (But still own the building!!!) for 5 years and I STILL do this almost monthly (pass out my “tickets”) when I find a desparate seller, I replace the car I’m driving with a newer model with less miles.

You NEVER want to buy a car WHEN YOU NEED ONE!!! Remember that!! You buy when an OPPORTUNITY presents itself.

THINK LIKE EVERYONE ELSE??? YOU GET EVERYONE ELSE’S RESULTS!!

11

I would just pay cash for a nice used car.

12

Anything that is paid off each month is not a recurring debt. Your house utility bills are paid off each month. Each month you get a new bill. This is not recurring debt. Same with auto insurance. You pay your insurance bill with a single annual or semi-annual payment. This is also a bill, not a recurring debt.

Recurring debt includes any credit obligations that won’t be satisfied in less than a year. A credit card balance or a car loan that can’t be paid off within 6 (or 11 depending upon the lender) monthly MINIMUM payments is recurring debt. Court ordered child support or alimony payments that will not terminate with one year are included in your recurring debt.

If house expense + recurring debt is less than 36% I can basically just add in a car payment up until the 36% to get the max I can pay for a monthly car payment correct?

If you are trying to see how much room you have to add more recurring debt before you fail to meet the qualifying ratios for an investment property purchase, then your calculation will work.

Early in this thread you said you needed to buy a new car and asked how your DTI would be affected by an auto loan. Now, you seem to be trying to use the DTI ratio to determine how much car you can safely afford to finance. If this is so, then lenders for your car loan will probably use a different DTI ratio. My bank tends to be conservative and uses a 40% DTI for auto loans while holding residential mortgage loans to a 36% DTI standard.

I agree with Suze Orman on auto purchases. She will tell you to never buy a new car but instead buy a 2 year old model of the car you want. Let someone else pay the depreciation first before you buy. She will also tell you to never finance for more than three years and that if you can’t pay the car loan off in three years or less, you are buying a car that is too expensive for your wallet/pocketbook.

13

Ah yes. Time for an old investor’s story.

I remember my son lustng after a new diesel pickup truck. Until he figured out that the car payment would be exactly the same as a payment on a new rental house.

He bought the house, instead.