When you apply for a car loan, the lender looks at the many aspects of your financial situation and overall stability. This means that the lender you’re applying with for auto financing is likely to consider your living situation, including your mortgage payment.
Applying for Vehicle Financing With a Mortgage
Lenders verify your residency when you apply for a car loan. Usually, you can prove your residency with a recent utility bill or a recent bank statement in your name. After you prove 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 about your monthly bills, including your mortgage or rent payment. Proving you have a stable job and income isn’t enough to qualify for auto financing alone – you need to prove you have enough money in your budget to pay for the vehicle on top of your other expenses.
This means your mortgage can affect your car loan eligibility. If too much of your income is currently being used to pay for other credit, and you don’t have much wiggle room in your budget, then a lender may not approve you for an auto loan.
Your Mortgage Payment and DTI Ratio
To see how much income you left after your other bills and loans, lenders use what’s called the debt to income (DTI) ratio formula. It’s simply your loans and credit card payments divided by your monthly gross income, and the answer is expressed in a percentage. Your DTI ratio doesn’t include things such as utilities or groceries, but a mortgage payment is most definitely included in the formula.
Sally gets $2,000 in gross monthly income. Her mortgage, credit card minimum payment, and the estimated car payment and auto insurance total to $950 a month. Her DTI ratio would be 47.5%. This is found by dividing 950 by 2,000, and converting the decimal to a percentage.
Now, car lenders have limits on how high your DTI ratio can be. For subprime auto lenders, or bad credit lenders, they typically require a DTI ratio that’s under 45% to 50% with the car payment and estimated insurance payment factored in. In Sally’s situation, she may or may not qualify for auto financing, since her DTI ratio is teetering right on the edge of being too high.
The lower your DTI ratio, the better your chance of qualifying for vehicle financing generally is. Car lenders look at your income and your current expenses because they don’t want to approve borrowers that are overextended financially. If taking on an auto loan pushes your budget to its limits, it’s a risk to the lender. They don’t want to set a borrower up for failure, so they prefer borrowers with low DTI ratios and enough wiggle room in their budgets that reassures them the car loan can be comfortably paid for.
My Mortgage Payment Is High!
It’s not always easy to get a low mortgage payment, and perhaps your interest rate isn’t the best on the home loan, either.
If your high mortgage payment is what’s putting your DTI ratio over the top, then opting for a less expensive auto loan could be the answer. If your DTI ratio is higher than 50% without the car loan payment and insurance factored in, then you may need to consider a joint auto loan.
A joint car loan means sharing responsibility for the payments with someone else, typically a spouse. You and your spouse or life partner can pool your income together to meet income and DTI ratio requirements. You both get your name on the title, and your credit scores are considered separately (usually the lowest credit score is used to meet requirements). With a co-borrower, it’s easier to lower your DTI ratio because two incomes are used to meet one requirement.
If bringing a co-borrower along for the ride isn’t an option, then you may need to provide a source of additional income. Some auto lenders consider another source of income to lower your DTI ratio such as alimony, child support, or Social Security. This depends on the lender, but be sure to be up front with them about your income and situation so they can work with your circumstances. Be prepared to prove you are receiving this additional income for the entire duration of the car loan.
Other Important Auto Loan Requirements
Besides meeting income and DTI ratio requirements, auto lenders typically review your credit reports. Most traditional car lenders have higher credit score requirements, and if your credit score is around 660 or lower, you’re usually considered a bad credit borrower.
Many banks, credit unions, and captive lenders of automakers 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 isn’t great, it can mean a car loan denial – regardless of if you have enough available income to pay for the auto loan. However, there are lenders willing to assist borrowers with less than perfect credit, called subprime lenders.
These indirect lenders are signed up with special finance dealers. They often work with borrowers who’ve gone through bankruptcy, a past repossession, or those with tarnished credit histories. Subprime lenders do review your credit reports, but they also take into account the other factors of your creditworthiness such as your ability to repay the loan, your income and work stability, and your down payment amount.
Ready to Take the Leap Into Auto Financing?
Having enough income and being able to cover all of your current obligations, such as your mortgage, is important to car loan eligibility. However, your credit score holds a lot of weight too. If you’ve been struggling to find a lender that can work with your credit, then let us help point you in the right direction.
Here at Auto Credit Express, we’ve created an easier way to get connected to dealerships with bad credit lending resources. We’ve cultivated a nationwide network of dealers that are signed up with subprime lenders, and we want to look for one in your local area. Get started by filling out our free auto loan request form, and we’ll get to work looking for a dealership near you.