05-20-2012 11:21 AM - edited 05-20-2012 11:22 AM
I currently have an auto loan with a balance of ~50k that I took out late last year. The monthly payments are about 11% of my monthly gross income (averaged over 12 months), or about 18% of my net monthly income (also averaged over 12 months). Within the next 6 months I will likely be seeking a mortgage loan for a condo in the price range of $280,000-320,000.
In 6 months time I should have roughly 65k in cash available to me (not counting 10k in emergency savings) and will owe about 45k on the auto loan. I am curious what course of action makes the most sense in terms of handling the auto loan prior to seeking a mortgate:
1. I could leave the auto loan as it is and contnue making the current monthly payments, leaving me with more immediately available cash to use for a down payment. The downside is that my debt to income ratio will be higher due to the presence of the auto loan.
2. I could pay off the loan entirely, bringing my debt to income to its minimum (no other debts), but this would leave me with only about 20k to use towards the mortgage (though I will still have the 10k in emergency savings), so my down payment takes a big hit. I could go this route but then save for another 6 months before seeking the mortgage to get my cash reserves higher while also eliminating auto loan debt, though I would rather get the ball rolling on the mortgage sooner rather than later.
3. I could put 15-25k towards the auto loan and then refinance the remaining value for a lower monthly payment, which would help my debt to income ratio but not totally wipe out my down payment savings. This is a balance of the above two options.
My credit score is not great (~670) because I've never sought out a credit card or anything other than this auto loan (no bad marks, just a thin file). My income is $130k+ and I am single and 26 years old.
Any thoughts? I appreciate the insight.
05-20-2012 01:08 PM
I would take copies of my credit report to a MB and see where you stand; without having your credit file pulled. Your DTI is excellent make sure you have three trade lines at least one year old no lates. I had to use one non-traditional trade line, my (electric bill). I would talk to a qualified lender before you pay down the car, you may need the cash for downpayment and closing cost. I would figure in 5-6% of the total loan amount for the closing cost unless you can get the Sellers to contribute.
05-20-2012 04:37 PM
I agree with waiting and doing what your lender says. Are you going to a bank, mortgage broker, or mortgage banker? Have you gotten your free copies of your 3 credit reports from "annualcreditreport.com" yet? If not, get them and go in and talk to someone. Even if you're not ready now, this gives you the direct you need.
If you don't have any credit cards reporting now, then you need to get them, or you will be forced to use "alternative tradelines" like your cell phone bill, cable bill, etc. It will help your score immensely to get a credit card reporting. I bet you will qualify for one, but if you don't, just go to your bank or credit union and get a "secured card" - it reports the same and helps your FICO the same.
What makes better financial sense? Paying more down on the house, or getting rid of the interest payments on the car? This is something to consider if the bank doesn't have an opinion on whether or not you have to pay the car off/down.
05-20-2012 04:55 PM
Based on your post, IMHO (I'm a Realtor with 30+yrs experience) your option to pay down the loan to $25k or $30k balance and refi it to extend over a longer period makes more sense. You can refi it so that the amortization is 36 to 48 months and if you want to make the larger payments, naturally you can do that. But the payment your mortgage lender will use is the one that shows on your credit report so your DTI will be within range and the payment will look reasonable to the lender. You want to appear stable and responsible and having a "reasonable payment" is one of those parameters that the underwriter will see when it gets to her/his desk. They don't mind if you accelerate the payment at all.
I agree with the advise to get a couple of credit cards so you have 3 tradelines. This puts you in good position to purchase, provided the cc's aren't used up (keep the balance at zero on one and less than 9% on the other). So, if you refi the car loan with a CU (recommended) get a credit card at the same time. This will take care of two tradelines (one installment and one revolving). Once you have the CU cc - getting something else will be easy.
Are you renting now? You may have a "payment shock" issue if you haven't been paying a sizable rent comparable with the property you are purchasing.
Do see a mortgage banker to get proper direction. You might want to check with a couple of good realtors in your area to see who has a decent mortgage banker to go to for your mortgage. Preparation is everything in a mortgage.
05-22-2012 04:06 PM
Thanks for the comments. In a perfect world I would have the patience to save up and pay cash for my home (having this auto loan drives me crazy, I hate debt and dread the feeling of a mortgage looming overhead constantly), but I would rather not wait 5-6 years to make that a reality. Hopefully I can secure a decent loan and then pay it off in ~7 years or so.
05-22-2012 05:35 PM
+1 to the pay-down car/refi plan, but if you have no other debt, then 11% added to your back-end ratio is not awful.