Snagging a new ride? If you’re buying a home, leasing a car could become a nightmare

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Published Date 2/14/2023

Cutting off your nose to spite your face? It’s an old expression, but that might be what happens when you lease a car while your loftiest goal is to buy a home. You may well be preventing one by doing the other.

Getting approved for a home loan at a favorable rate is the goal of most homebuyers. But for many, that involves paying down debts or existing loans to the best of your ability. A common mistake some make is entering into a car lease.

Realtor’s Ana Durrani explains how leasing or financing a car sound like the same animal, but vary greatly in the eyes of a lender. “Lenders calculate your debt-to-income, or DTI, which is a person’s monthly debt payments divided by gross monthly income. Lenders look at your DTI to measure your ability to handle monthly payments to repay money you will borrow,” she says. “When evaluating a mortgage application, lenders will review several factors like credit score, debt-to-income ratio, and intended down payment. Most lenders prefer a DTI lower than 36%; a DTI of 43% is typically the highest a borrower can have and still qualify for a mortgage.

She uses the example of a potential buyer that makes $120,000 per year — equivalent to $10,000 per month in gross earnings. That person can usually qualify to spend up to $4,300 per month for all expenses appearing on the credit report exclusive of housing. Mortgage lenders, however, view car leases similarly to rent, since leasing fails to build any equity in the car. At the end of the lease agreement, a person can either purchase the car being leased, or lease or purchase another car.

Chase Home Lending consultant Ashley Moore puts it this way: “When you finance a car, each monthly payment brings you closer to owning the car outright. Once you pay off a financed loan, a car that you own outright is viewed as an asset by mortgage lenders and can help to strengthen your mortgage application,” she says.

Durrani explains how some mortgage lenders may even allow you to exclude an installment loan (e.g., a car loan or a student loan) during the mortgage approval process if you have 10 or fewer payments to make — all in order to lower your DTI. But a car lease may be a bridge too far because you cannot pay off the lease to exclude the payment. Another lender advises that the only exception would be if you could provide a letter explaining that you are not going to lease a car again. Then your lender may permit you to exclude it.

Ways to get around this? “The first option is to complete your car lease term prior to applying for a mortgage or to wait to lease a car until after you’ve closed on your home,” says Moore. “This will ensure the lease is not considered in your DTI calculation.” She adds that if the lease is paid off before applying for a mortgage, lenders might ask for documentation to prove the car was returned or financed at the close of the lease.

Or, you can try to end your lease early or transfer the lease to someone else in order to discharge the debt. In any case, consult with your mortgage lender on how a car lease, existing or proposed, will affect your ability to procure a mortgage loan as well as any options available to you.

Realtor, TBWS

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Wymac Capital, Inc.

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