Pay Down Debt

Lenders look at three factors to determine whether you qualify for a mortgage loan and how much you qualify to borrow.

  1. Cash, lenders usually expect that the buyer contribute some money toward the purchase of the home. You need to have savings to cover:
    • Down payment (typically 2-3%, of the purchase price of the home)
    • Closing costs (3-5% of the mortgage loan amount)
    • 1-2 months living expenses as emergency reserves (required sometimes)
  2. Capacity your ability to pay back the mortgage loan. It takes into account both your income and minimum monthly payment on debts.

    Your monthly debt affects how much you can borrow. Take a look at the following chart:

    Gross Monthly Income Monthly Debt (Car Loan) Credit Card 1 (minimum payment required on unsecured debt) Credit Card 1 (minimum payment required on unsecured debt) Total Monthly Debt
    $3,200 $300 $50 $50 $400

    At 5.75% Interest Rate:

      Mortgage Amount Borrower Qualifies For
    With current debt of $400 per month $156,279
    If car loan is paid off, only $100 in minimum payments on credit card debt $207,686
  3. Credit History Your credit history shows a lender your willingness to pay past debts and is believed to be an indicator of your future credit risk.

Differences Between a Car Loan and a Lease

Before you get your next car, evaluate the costs and benefits of leasing versus buying a car.

  • Ownership. With a lease, you do not own the car. Leases are basically long-term rental agreements. You make monthly payments to the dealership. These agreements might last 2-5 years. If you obtained a car purchase loan, you would own the car at the end of the loan.
  • Wear and Tear. Most leases charge for exceeding “normal” wear and tear. If you bought, you would not have any additional costs for wear and tear in your purchase agreement.
  • Monthly Payments. You will have lower monthly payments if you lease a car rather than if you finance a car. The reason monthly lease payments would be lower than monthly loan payments is because you are not purchasing the car. The dealership owns the car. Once the lease agreement is over, you usually turn in the car. Although you have the option of purchasing the car at the end of the lease, the total cost would be more than if you had initially bought the car. On the other hand, with a car loan, you actually pay for the purchase of the vehicle. Once you finish making the payments, you own the car.
  • Mileage Limitations. Leases usually restrict the number of miles you drive each year. You must pay the dealer for each additional mile driven, as stated in your lease contract. For example, a two-year lease might have a 24,000-mile restriction and cost you $0.15 for each mile driven over 24,000. This can add up if you drive a lot. Driving 2,000 miles over the limit would cost you $300 (2000 x $0.15 = $300). If you buy a car, there are no mileage restrictions.
  • Auto Insurance. Auto insurance usually costs more if you lease than if you purchase a car. Most car leases require you to purchase higher levels of insurance coverage. Make sure you find out what the requirements are and get an estimate from your insurance company before you decide on a lease.

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