Lease/Purchase and How It Affects Future Mortgage

[Anonymous]

Hello,

I would like some advice. I have an installment loan on a Tacoma that I owe $29K on. In preparation for an upcoming mortgage (still several months away), I was considering trading/selling the vehicle with the positive equity I’ve gained and leasing another vehicle.

I have never personally leased but have done an exhaustive amount of research on this forum to where I would feel comfortable doing so and know it’s pros and cons. My question is, when the lease is reported, will it only show the actual amount borrowed, say only the 36-month term and the amount you will pay over that 36 months or would it show the full purchase price of the vehicle, like say a traditional purchasing loan if you had put $0 down?

My second question is, is it worth the hard inquiry and slight hit to AAoA (I’ve only had the loan for about 14 months) to reduce the overall debt reported on my credit report by about $17K (29K loan disappears from report and replaced by $12K or what I would pay over the 36 month lease term)

I hope you can understand my thought process here. My scores are 765-775 range, no derogatories, no lates. I have a $16K loan remaining on our second car, along with this $30K loan. Extremely low amount of inquiries.

[tooleman694]

I have leased a few cars, and it reports some what like an installment loan but worse.

So lets say you lease a car for 30k and put nothing down. And lets say the cost of the lease is 2k. It would report on your credit as owing 32k. And since lease payments are typically smaller then a purchase, it takes a long time to bring down what you owe.

At the end of the lease you would owe like 15k, so you either pay off the 15k, trade it in or return the car.

Typically you don't want to do any big moves on credit before getting into a mortgage. You also seem to be more worried about total debt owed vs your DTI. The amount you owe is less important vs the size of the payment.

But your scores are very good, you have some wiggle room to work with when your score drops from a new autoloan. I would only do it now if you are worried about your DTI and need to get your payments down.

[Anonymous]

Thank you for your response!

My DTI is well below the threshold, and I was confused about how the lease reports. So you’re saying if I leased a car with a purchase price of, for example, 35K, that full 35K reports as a balance owed on my credit report? Because, if that’s the case, I would just hold where I’m at - the only reason I was considering a lease is if it reported only as the amount I owe over the 36 month term, like $12K or so. If the full price of he car is going to show on my report anyway, then I will just stick with my financing.

We can afford the payment easily, and our DTI is excellent, I was simply looking to decrease total amount owed or debt overall to prepare for a mortgage and to see if that would help garner the most aggressive rate I could get.

[tooleman694]

Not just the full 35k, but whatever the lease cost is as well. The money factor works differently then interest, so they put the lease cost on top of the full amount.

The last car I leased was 40k and the cost to lease was 5k, so it reported I owed 45k. It really sucks.

[tooleman694]

Also don't be concerned about the amounts you owe, the bank doesn't care. They look at the DTI.

The only time the amount owed is looked is if you are a few months away from paying off an installment and they remove it from your DTI.

[Anonymous]

You’re the man, Tooleman!

You answered all of my questions and cleared up that confusion. I’ll hold steady where I’m at as that’ll be the best approach, as I was only considering it if it reported just the leased amount over the 36 month term. It’s also good to know the bank places emphasis on the DTI over the size of the loan.

You have been a great help, sir. Thank you again.