If you’re thinking of buying a home, you can prepare your finances and set goals by calculating your borrowing power. You can search online for borrowing power calculators that can estimate your credit worthiness based on your income and financial commitments. If you’re wondering: Does my car payment affect my borrowing power? The answer is yes.
Having a car payment means that part of your income is not available for loan payments. For example, someone with a $2000 monthly income and a $350 car payment can borrow up to $84,000. That amount falls to $63,000 with a $500 car payment. But with out one, borrowing potential rises to $132,000.
Your borrowing power depends upon your debt to income ratio. It’s the percentage of your income that goes to paying off your debts. Most lending institutions consider good ratio to be 36%. That means that no more than that percentage of your income goes to paying off debts. You can calculate your ratio by adding up your debts (leave out household expenses) and divide that number by your total monthly income.
Paying off your car note is a great way to increase your borrowing power. Actually, the payment isn’t the only cost of keeping the car. In addition, there are the costs of maintenance, insurance and fuel that can raise the monthly payment. Again, all the money that goes toward the car can’t go toward other debts, including a mortgage.
The good news is that with a little research you can keep your car expenses low. Try finding a used car and if possible, pay cash. Some states require that you carry liability insurance on a car if you’re making payments. And look up repair costs of the model you want, down to replacement parts like tires. Keeping this expense low can help you lower your debt to income ratio and raise your borrowing power.
Use My Free Mortgage Calculator
Calculate Your Borrowing Power
Figure Out Your Debt To Income Ratio
See Current Interest Rates
Learn About Different Mortgage Options
Fixed Rates VS ARM Rates
