topic Re: looking to finance a vehicle. in Auto Loans

looking to finance a vehicle.

alessandrom — Sun, 27 Jan 2013 02:31:10 GMT

Greetings everyone I'm looking to finance a vehicle I have the cash to purchase a decent car on the spot however I figured this loan reporting will boost my credit drastically (only have cc loans on file) my question is does having a lot of credit card inquiries hurt my chances of being approved? I have never applied for mortgage or auto loan thank you guys

Re: looking to finance a vehicle.

Revelate — Sun, 27 Jan 2013 02:33:42 GMT

alessandrom wrote:
Greetings everyone I'm looking to finance a vehicle I have the cash to purchase a decent car on the spot however I figured this loan reporting will boost my credit drastically (only have cc loans on file) my question is does having a lot of credit card inquiries hurt my chances of being approved? I have never applied for mortgage or auto loan thank you guys

Nah, FICO score determines more on APR you receive than actually getting approved, I wouldn't sweat the inquiries in the slightest... especially as auto loans are the easiest of any loan product to be approved for.

I would agree that financing makes more sense from a FICO perspective, but you may want to hammer the principle down quickly such that you don't pay nearly as much in interest charges over the course of the loan.

Re: looking to finance a vehicle.

alessandrom — Sun, 27 Jan 2013 17:43:20 GMT

I agree with you,However im looking to buy a home in a couple of years and i was guessing that paying this auto loan will look very good to the home lenders. Correct me if im wrong im new to all this and thank you for the advice

Re: looking to finance a vehicle.

StartingOver10 — Sun, 27 Jan 2013 18:34:44 GMT

No, the auto loan won't help with a house loan. In fact, it affects your DTI directly - dollar for dollar in some cases.

If you go into a mortgage lender without an auto loan they *assume* you will never have one and won't input one into your file. If you do have an auto loan, they assume you always will have an auto loan and use the monthly payment in your back end ratio. If the auto loan is large enough or the monthly income small enough, then the auto payment can actually reduce the amount of house payment for which you are qualified. I have seen some families actually not be able to buy because they have two huge auto loans eat up what would be the allowable mortgage payment.

So if you can possibly work it out, get the house before you purchase any vehicle with a payment. (And leasing a vehicle is worse.)

Re: looking to finance a vehicle.

Revelate — Sun, 27 Jan 2013 18:54:15 GMT

alessandrom wrote:
I agree with you,However im looking to buy a home in a couple of years and i was guessing that paying this auto loan will look very good to the home lenders. Correct me if im wrong im new to all this and thank you for the advice

It'll help from a mix of credit perspective if you don't have much in the way of installment history. Nobody (well hardly any) uses a Mortgage-enhanced score for mortgage loans, and as such it's no different than what it would count as in the generic FICO model.

If you don't have an auto loan and need a car, then I certainly suggest financing a car; however, I wouldn't buy a car just for FICO purposes. StartingOver is definitely correct if the car is not paid off (or mostly at least) by that point, it will be factored into your DTI calculation and that's a straight negative from a mortgage perspective. If it's paid, I'm not certain as to whether it would help underwriting at all or not... if it is factored at all it's probably so far down the list of importance to be near irrelevant when it comes to underwriting a mortgage.

Re: looking to finance a vehicle.

alessandrom — Sun, 27 Jan 2013 20:37:26 GMT

Thank you so much for the opinions I will definitely explore my options and make a decision based on it really do need a vehicle though and some cc lenders have turned me down for not having any other loans other than ccs so what I might do is finance giving about 50 percent down payment is this a good idea? By the way your words are so helpful you guys should be getting paid for all this!!

Re: looking to finance a vehicle.

Revelate — Sun, 27 Jan 2013 20:50:12 GMT

alessandrom wrote:
Thank you so much for the opinions I will definitely explore my options and make a decision based on it really do need a vehicle though and some cc lenders have turned me down for not having any other loans other than ccs so what I might do is finance giving about 50 percent down payment is this a good idea? By the way your words are so helpful you guys should be getting paid for all this!!

Well, if it were me, I'd put down the minimum downpayment required, and then if it were a higher interest rate than I was willing to tolerate, start kicking extra cash to it above your regular payment.

Alternatively if I got a great rate, I'd likely do something else with the cash. Being cash flush is never, ever a bad situation to be in.

There's a few reasons for the first approach: some lenders will push your payment date way out into the future if you pay extra and so you can maximize your tradeline length with minimal interest paid... also if you put down 20%, then kick in 30%, it dramatically changes your amortization curve and quite often larger loans have smaller (may not be significant) APR's associated with them if you look at the various auto lender financing tiers.

I could pay off my current auto loan immediately but it's not hurting me much financially, so I'd personally rather have the increased length on the tradeline from a FICO perspective; that said, for when it comes to getting pretty pre-mortgage, I will absolutely be paying it down to under the 10 month remaining mark to get it excluded from a DTI calc, or maybe pay it off completely depending how much free cash I have. Free cash is a good thing when it comes to mortgage underwriting.

Edit: if this is your first auto loan, you're going to want to look at re-financing it most likely in the future anyway; not a big deal, just be aware that the initial interest rate isn't likely what you're going to get later... in my case even with my shoddy credit report I went from 19.35% -> 5.99% on a refinance, so it can be done moderately easily. You may qualify for a sweetheart dealer financing deal anyway depending on your scores which I suspect are better than mine now, and almost assuredly better than what mine were initially. Oddly, from a pure FICO perspective with the way WFDS does their payment date, I would've kept the 19.35% APR had I known I was going to stumble into additional cash for a few months... if I had cash to just buy the car outright, personally I'd play stupid FICO tricks in terms of tradeline farming :).

Re: looking to finance a vehicle.

alessandrom — Sun, 27 Jan 2013 21:03:06 GMT

That makes sense thank you for it educated thought I actually might consider doing this it makes a lot of sense thanks!

Re: looking to finance a vehicle.

MovingForward_2012 — Mon, 28 Jan 2013 06:03:22 GMT

Hmmmm... I'm not so sure leasing a vehicle is worse as you have a lower monthly payment plus you are only financing the use of the car over 12-36 months, not the full purchase price of the vehicle. My auto lease actually improved my DTI for my mortgage. As if I financed, my monthly payment would have been $150 more plus I would have $35K total debt on my credit report versus the $18K I currently have for the lease. The other nice thing about a lease, is you have minimal maintenance as you don't have to worry about the crap that starts breaking at 100K miles...been there done that. So if you can't qualify for a mortgage with your credit, getting an auto loan would help your credit score. In fact, it was an auto loan after BK that really boosted my scores. As for qualifying for less house, as others said, that is income dependent. I make $96K a year and still got preapproved for more house ($360K) than I needed with a $536 per month lease payment on a luxury sedan. YMMV

Re: looking to finance a vehicle.

StartingOver10 — Mon, 28 Jan 2013 13:00:58 GMT

Qualifying for a mortgage is not only income dependant but also dependant upon your actual ratio's which consists of the debt (both front and back end).

MovingForward_2012 wrote:
Hmmmm... I'm not so sure leasing a vehicle is worse as you have a lower monthly payment plus you are only financing the use of the car over 12-36 months, not the full purchase price of the vehicle. My auto lease actually improved my DTI for my mortgage. As if I financed, my monthly payment would have been $150 more plus I would have $35K total debt on my credit report versus the $18K I currently have for the lease. The other nice thing about a lease, is you have minimal maintenance as you don't have to worry about the crap that starts breaking at 100K miles...been there done that. So if you can't qualify for a mortgage with your credit, getting an auto loan would help your credit score. In fact, it was an auto loan after BK that really boosted my scores. As for qualifying for less house, as others said, that is income dependent. I make $96K a year and still got preapproved for more house ($360K) than I needed with a $536 per month lease payment on a luxury sedan. YMMV

If the OP leases a vehicle and it is too much vehicle for his income, then he has to do more than just buy out the lease, he has to purchase the vehicle. I have had customers of mine that had to go through this when they had leased a vehicle first, before buying a house and their payments were too high to support both the house and the vehicle(s) payments. It creats a real mess, that's why I said "worse". If, however, the OP is buying a vehicle well within his ratios then it doesn't matter from the mortgage perspective if he leases or buys. There are other items to consider.

Many first time home buyers don't keep in mind their back end ratio when looking to acquire a vehicle. That was my point.

Re: looking to finance a vehicle.

MovingForward_2012 — Mon, 28 Jan 2013 16:05:18 GMT

The same thing goes for an auto finance. He can get in way above his head there. I do see the secondary effect of a high lease. With that being, if OP can't get approved for the mortgage with the higher DTI because OP got into a high lease and the DTI blows away any option in purchase price, OP would have to find someone to take over his lease.

I could say there is a similar more definitive scenario with financing as he would have a higher monthly payment than a lease, which would affect his DTI more and push him to have to sell the car for the mortgage.

Granted, both scenarios cost money even though leasing requires two steps to get out. The lower monthly payment to start out with in a lease would probably get him by for longer and perhaps long enough to get an increase in salary that would help his DTI. But I think we do both agree that it is likely OP will crash and burn but a lease gives OP more time to save himself. There is a risk of not being able to find another leaser as with luxury dealerships, they are real picky about subletting the lease and some won't let you do it at all.

Re: looking to finance a vehicle.

MovingForward_2012 — Mon, 28 Jan 2013 16:08:28 GMT

And yes, you are correct that if he can't sublet the lease, he would have to buy it out, which would be very costly.

Re: looking to finance a vehicle.

MovingForward_2012 — Mon, 28 Jan 2013 16:11:57 GMT

That is why I think OP needs a longer payment history around his belt for an amount equal to or close to the lease payment he wants to assume so that he is comfortable he can make the payments for the full lease term and also to OP needs to make sure his job is stable too.

Re: looking to finance a vehicle.

Revelate — Mon, 28 Jan 2013 18:08:01 GMT

The mortgage is several years out. The OP has enough cash on hand (or possibly more) to put down a 50% downpayment on the car... which in the vast majority of cases means the OP doesn't have a cash flow issue. Any downpayment over 30% is completely superfluous to the point of assuring auto-loanage assuming there's any rational expectation the payments can be made. If two paystubs can be produced, the approval currently is just not a problem, and there's more than enough time to make things pretty pre-mortgage either through refinancing it or throwing money at it.

We're seriously overthinking this :).

Re: looking to finance a vehicle.

MovingForward_2012 — Mon, 28 Jan 2013 18:12:53 GMT

Well if the mortgage is two years out, she could get a 24 month lease. That way if the monthly payment is too much for the mortgage, she has the option of not releasing but most lenders assume you will continue to lease.

I have never heard of anyone putting 50% down on a lease.

Re: looking to finance a vehicle.

Revelate — Mon, 28 Jan 2013 18:21:46 GMT

MovingForward_2012 wrote:
Well if the mortgage is two years out, she could get a 24 month lease. That way if the monthly payment is too much for the mortgage, she has the option of not releasing but most lenders assume you will continue to lease.

I have never heard of anyone putting 50% down on a lease.

The lease conversation has been between you and SO10 :). I'm not certain this was ever in the OP's plans.

Re: looking to finance a vehicle.

StartingOver10 — Mon, 28 Jan 2013 18:45:06 GMT

Revelate wrote:
The lease conversation has been between you and SO10 :). I'm not certain this was ever in the OP's plans.

True!

Re: looking to finance a vehicle.

MovingForward_2012 — Tue, 29 Jan 2013 00:18:29 GMT

I know SO10 brought up the statement that a lease would be worse...not sure why if OP wasn't looking to lease. So I just happened to respond to a side comment.

Re: looking to finance a vehicle.

alessandrom — Sun, 03 Feb 2013 02:58:34 GMT

Thank you all for the input. I'm a small business owner and make little over 250k a year. I was looking to finance a car because I thought perfect payment history would look great upon purchasing a home two years from now when I improve my scores. I can certainly buy a car cash like I did with my current vehicle, but I doubt that will do anything towards my credit scores. Should I lease? Or finance any other opinions? You guys have been very helpful thank you

Re: looking to finance a vehicle.

Revelate — Sun, 03 Feb 2013 03:13:56 GMT

alessandrom wrote:
Thank you all for the input. I'm a small business owner and make little over 250k a year. I was looking to finance a car because I thought perfect payment history would look great upon purchasing a home two years from now when I improve my scores. I can certainly buy a car cash like I did with my current vehicle, but I doubt that will do anything towards my credit scores. Should I lease? Or finance any other opinions? You guys have been very helpful thank you

I'm of the opinion auto loans do look good in general; SO's comment was that open auto loans will be factored into your DTI calculation which could hamper your ability to get a house when they calculate the ratios. Your rationale is almost entirely the reason I financed my car, would've been easy for me to pay cash for a reasonable car but I needed improvement in my scores. I don't have an income problem (except I can't pay cash for a 700K house around here, stupid CA prices) I have a credit problem. Sounds like your situation is analogous though perhaps not quite as bad as mine was.

I was looking your situation from the perspective that you could pay cash now, the interest probably isn't that big of a deal compared to the mortgage later if you can move up a tier, and you can always pre-pay the loan down below the minimum amount that it'll be factored into DTI calculation anyway. SO is admittedly much, much more savvy than I am when it comes to mortgage lending, but I think you have the available resources to play silly FICO games to try to setup your credit profile for later goodness.

I certainly wish I'd financed a vehicle much earlier in my own life, I paid cash for everything till age 36. I was once labelled as the dumbest smart kid ever when I was 14, not sure about the smart part anymore, but dumb is probably an appropriate label looking at that situation. Leasing meh, unless you want to flip your car every couple years it doesn't make sense.