Does Getting a New Car Hinder a FHA Loan?
If you're looking to purchase your first home, buying a new car may not be a top priority as you probably need every penny you can scrape up to make a down payment. However, circumstances may arise where getting a new car becomes a necessity instead of a luxury. Before buying a car, consider the impact the transaction may have on FHA loan eligibility.
Other People Are Reading
-
Identification
-
A FHA mortgage is a home loan backed by the Federal Housing Administration, a federal agency which is part of the U.S. Department of Housing and Urban Development. FHA loans are valuable to first-time home buyers because they help qualified buyers unable to make the typical 20 percent down payment required by most non-FHA lenders. FHA borrowers normally pay a slightly higher interest rate than the current market bears and may need to carry private mortgage insurance to protect the lender against default.
Debt-to-Income Ratio
-
An important factor used by lenders to determine your creditworthiness and amount they are willing to lend you is your debt-to-income ratio, which is the relation of the amount of debt you carry to your income. For FHA loans, lenders like to see that your front-end ratio, which includes your proposed monthly housing costs, such as your mortgage, interest and insurance, will not exceed 29 percent of your gross monthly income. They also prefer that your back-end ratio, which includes the total of monthly consumer debt obligations, including car payments, does not exceed 41 percent of your income.
-
New Car Purchase
-
If you are thinking of buying a new car, it may be wise to wait until after you've secured your FHA loan and closed the deal to avoid exceeding your back-end limit. For instance, if your gross monthly income is currently $3,000 and your total monthly debt payments are $1,200, or 40 percent of your income, a new-car purchase will likely push you over the 41 percent threshold.
Considerations
-
If you desperately need a vehicle and cannot wait until you settle on your home, consider paying cash for a used car if you have the money on hand. If you must finance your purchase, do your best to negotiate a monthly payment that allows you to stay within the 41 percent limit. Lenders may allow you to stretch the limit a bit if you have a much higher credit score than the FHA baseline 620 figure or can make a large down payment.
-
