When you apply for a car loan, the lender looks at many aspects of your financial situation and overall stability. This means that the lender you are applying to for auto financing will likely consider your life situation, including your mortgage payment.
Apply for vehicle financing with a mortgage
Lenders verify your residence when you apply for a car loan. Usually, you can prove your residency with a recent utility bill or recent bank statement in your name. Once you’ve proven your residency, the lender takes a closer look at your monthly income compared to your other bills.
Your lender requires proof of income and details of your monthly bills, including your mortgage or your rent payment. It is not enough to prove that you have a stable job and income to qualify for auto financing – you must prove that you have enough money in your budget to pay for the vehicle in addition to your other expenses.
This means that your mortgage can affect your car loan eligibility. If too much of your income is currently being used to pay off other loans and you don’t have a lot of wiggle room in your budget, a lender may not approve you for a car loan.
Your mortgage payment and DTI ratio
To see how much income you have left after your other bills and loans, lenders use something called the Debt-to-Income Ratio (DTI) formula. It’s just your loans and credit card payments divided by your gross monthly income, and the answer is expressed as a percentage. Your DTI ratio doesn’t include things like utilities or groceries, but a mortgage payment is most definitely included in the formula.
Example:
Sally gets $ 2,000 in gross monthly income. Her mortgage, minimum credit card payment, and estimated car and auto insurance payment are $ 950 per month. Its DTI ratio would be 47.5%. This is found by dividing 950 by 2000 and converting the decimal to a percentage.
Now, auto lenders have limits on how high your DTI ratio is. For subprime auto lenders or bad credit lenders, they typically require a DTI ratio of less than 45% to 50% with the car payment and the estimated insurance payment factored in. In Sally’s situation, she may or may not qualify for auto financing because her DTI ratio is about to be too high.
The lower your DTI ratio, the better your chances of qualifying for vehicle financing. Auto lenders look at your income and current expenses because they don’t want to approve borrowers who are financially overburdened. If taking out a car loan pushes your budget to its limits, it is a risk for the lender. They don’t want to defeat a borrower, so they prefer borrowers with low DTI ratios and enough wiggle room in their budgets to reassure them that the car loan can be comfortably paid off.
My mortgage payment is high!
Getting a low mortgage payment isn’t always easy, and maybe your interest rate isn’t the best on the home loan either.
If your high mortgage payment is what puts your DTI ratio above, then switching to a cheaper auto loan might be the way to go. If your DTI ratio is over 50% without the car loan payment and insurance taken into account, you may need to consider a joint car loan.
A joint car loan means sharing the responsibility for payments with someone else, usually a spouse. You and your spouse or life partner can pool your income to meet income and DTI ratio requirements. You both get your name on the title and your credit scores are considered separately (usually the lower credit score is used to meet the requirements). With a co-borrower, it’s easier to lower your DTI ratio because two incomes are used to meet a requirement.
If it is not possible to bring in a co-borrower for the ride, you may need to provide an additional source of income. Some auto lenders consider another source of income to lower your DTI ratio, such as alimony, child support, or Social Security. It depends on the lender, but be sure to be upfront with them about your income and your situation so they can adjust to your situation. Be prepared to prove that you are getting this extra income for the life of the car loan.
Other important auto loan requirements
In addition to meeting income and DTI ratio requirements, auto lenders typically review your credit reports. Most traditional auto lenders have higher credit score requirements, and if your credit score is around 660 or less, you are generally considered a bad credit borrower.
Many banks, credit unions and captive auto lenders prefer borrowers with higher credit scores. Borrowers with the highest credit scores have a better chance of qualifying for vehicle financing and lower interest rates.
If your credit score is not good, it can mean car loan denial, even if you have enough income to pay off the car loan. However, there are lenders ready to help borrowers with less than perfect credit, called subprime lenders.
These indirect lenders are registered with special financing brokers. They often work with borrowers who have gone bankrupt, have already been foreclosed, or have a tarnished credit history. Subprime lenders look at your credit reports, but they also take into account other factors of your creditworthiness, such as your ability to repay the loan, your income and job stability, as well as the amount of your down payment.
Ready to take the leap into auto financing?
Having sufficient income and being able to cover all of your current obligations, such as your mortgage, is important for car loan eligibility. However, your credit score also carries a lot of weight. If you’re struggling to find a lender who can work with your credit, let us help point you in the right direction.
Here has Auto Express Credit, we’ve created an easier way to get in touch with dealers with bad credit loan resources. We have developed a nationwide network of dealers who are registered with subprime lenders and we are keen to find one in your area. Start by filling out our free auto loan application form, and we’ll get to work finding a dealership near you.
