Lots of people know that in order for you to qualify for a mortgage, income is very important. But what people don't know is that your monthly debt payments are just as important in the mortgage qualification process. It can prevent you from buying your dream home.
Here’s a scenario:
Say you make $100,000 per year and down payment is not an issue but you can only afford 20%. For someone who makes $100,000, assuming you have above average credit and no debt, you could consider a purchase price of $700,000 ; with a down payment of $140,000 and your mortgage amount will be $560,000. That’s not bad right? $700,000 can get you a very nice one bedroom or a 2 bedroom that’s possibly older or further away from Vancouver city centre.
However, it turns out you have a car payment of $600. Now that changes things. Instead of looking at something that’s $700,000, now the purchase price decreases to $562,500, with a down payment of $112,500 and the mortgage amount will be $450,000...Because of a $600 monthly payment, you now qualify for $110,000 less!
As you can see, that’s a huge downgrade.
So what can you do?
The best solution is to payout the car loan. Usually, car loans will be around say $50,000. Just by paying $50,000, you can increase your mortgage qualification by $110,000. That’s much better than trying to scramble for $137,500 more in cash.
So, if you’re looking to get a mortgage, review your debt payments. Don’t go and purchase a car and get stuck with a fixed monthly debt payment. And if you do have a car payment and you have cash left over above and beyond your down payment, then pay it out. Don’t use the cash left over towards the down payment because the impact will be much greater if you payout the debts!
If you have any questions, please don't hesitate to reach out and ask us! We're here to help.