Why Financing a Vehicle Can Be Better Than Leasing When Applying for a Mortgage

When you’re planning to buy a home, how you finance your vehicle can affect how much mortgage you qualify for. In some situations, financing a vehicle can be more favorable for mortgage qualification than leasing one.

One reason is the loan term. Choosing a longer auto-loan term can lower your required monthly payment. Since mortgage lenders generally use the required monthly payment when calculating your debt-to-income ratio, a lower car payment could help you qualify for a larger mortgage.

That doesn’t necessarily mean you have to take the full term to pay off the car. Many auto loans allow you to make additional principal payments or pay the loan off early without a prepayment penalty. You should always verify the terms of your specific auto loan before assuming this, but it can give you the flexibility to have a lower required payment while still paying the vehicle down faster.

Financing can also have an advantage as you approach the end of the loan. Under certain mortgage guidelines, an installment loan with 10 or fewer payments remaining may potentially be excluded from your debt-to-income ratio, although there are circumstances where the lender may still need to count it.

Leases are different. Even if your vehicle lease only has a few payments remaining, the lease payment will generally continue to be considered because leasing represents an ongoing housing—rather, vehicle expense that is expected to continue after the current lease ends.

So if buying a home is part of your future plans, don’t only look at the price of the vehicle. The type of financing, required monthly payment, and remaining term can all affect your mortgage qualification. Before financing or leasing a vehicle, consider speaking with your loan officer about how the new payment could affect your future purchasing power.