Finding enough rebates and/or price cuts to absorb 10K in negative equity is going to be a monumental project. And if they are selling a given new car at that low of a point below value, then you have to wonder why - cars lose a considerable chunk of their value once they are purchased and driven off the lot, but what on earth is making a particular model lose so much of its value before it's even sold?
As it sits now, if you really do intend to roll that much negative equity into a new car deal, you're going to have to shop at a price point above 45-50K. If the new car is worth 48K, for example, then a 120% LTV loan would allow you to roll in $9600 above the value of the car - keep in mind, this includes taxes and fees on the new car, and the negative equity on the trade-in. And know that a loan of this size, at 5% interest, is going to yield a monthly payment of well over $1000 on a 5-year note. Which brings your DTI into play, since you already have other obligations on the books - you'll have to be able to cover DTI on this new payment as well and still be below the lender's requirements to get approved. You'll also have to have a solid auto history, and perhaps even then they may not agree to write you a loan if you have no previous experience borrowing at this level.
You have to calculate not only based on LTV, but on the idea that you are looking at adding about $170 a month to whatever new payment you incur, to pay off the negative equity in five years at 5%. If your file would put you in a higher interest range, that amount increases. At 12%, it's over $220 just in negative equity payments, never mind the new vehicle itself.
At this point, obviously selling the car outright isn't an option - you cannot clear the title to it until you pay off the entire remainder of the loan, and no buyer is going to give you $15K on a $5K car. Trading it in is going to put you in a very, very deep equity hole on any new vehicle, and give you an incredibly large loan on a new vehicle that, in itself, will by definition not be worth enough to cover the loan balance for years and years to come, if ever. (I'd bet on never, since depreciation is going to accelerate faster than the principal on the loan is going to fall.) If you do decide to take the plunge, however, at the very least make sure you contact your insurance carrier and buy GAP coverage. I don't often advovate buying this in most cases, at least not past the first couple of years of a 5-year loan, but in your case, you're going to need it until the very end.
