Paying down Car Loan to Improve DTI

[Jennifer Connolly]

Hey folks,

I'm planning on getting a preapproval soon, but I have a DTI issue I need to resolve.

I pay $380 per month for my car and have 16 months of payments left on it. Unfortunately, with my low income my current DTI does not give me much purchasing power. On the bright side, I should qualify for both down payment assistance and the Masshousing loan due to my income and first time buyer status, but I still need to get my DTI to be more manageable so I can afford to buy more than a parking space in MA.

A lender I spoke to said that if I pay it down so I have less than nine payments remaining they "may" not factor it into DTI if I have enough liquid funds in the bank to show that I could pay it off and also have enough for a down payment. It's the "may" and the "and" that's getting me LOL

She recommended I do this and then wait for it to hit my credit report before applying for preapproval.

At this point, I could pay the whole thing off with just under $6k, but that would leave me with $5K for a down payment, which would probably be fine assuming a get another $3-4K in down payment assistance, but I hate to assume.

Alternatively, I was thinking I could pay $4K off now, which would leave me with around five payments left just to keep the trade line open a bit longer and probably by the time I get all my ducks in a row and get to closing on a property I might only have one or two payments left on it anyway.

What do you think?

[Mike H.]

But sometimes cash in the bank earning no interest has far more value than the 8% interest that it might return if you pay off a loan balance that is costing you 8%.

Here's the example I use. 7 or so years ago I took out a HELOC for 43k when I first started. I pulled out every penny and stuck it in the bank. I'm still paying 3% on the HELOC money. But that cash in the bank was my bona fides to qualify for loans for investment properties. Without that HELOC, I would not have a single investment property today.

So there are times when the value or return on your money can't necessarily always be calculated on the return you might save. Having cash in the bank might have 100 times more value than paying down a loan somewhere else.

That 43k may be costing me 3% a year right now (my interest only payments are roughly 110 bucks a month). But it was the only reason I was able to invest in real estate to the point that I now have 24 (soon to be 25) properties with a net profit of about 5 to 6k per month.

So what is that money really making me for a return?

There were a couple of key things I heard over and over in my real estate investing readings and one of them is really a good fit here.

1) A lot of investors' biggest regret is selling any property they've every had. A majority of them wish they had kept every single one. So I am buy and hold only.

2) Best product, best price. I started out thinking I should do cheap rehabs. My turnover showed me why that was a bad model. Now I make them nice and have at least one or two things that really pop. Big difference.

3) Cash is king. Having cash in the bank is one of the most important tools an investor can have. Its the difference between investing and not. You can't qualify for loans without it. If you're starting out, you're going to have a far easier time if you have some cash in the bank than if you don't.

So treat your capital as if it were gold - because it is. If you have to take on debt to preserve your cash, do it. You're going to want every penny you can hold onto.

So in this case, I definitely would not pay off that car loan. Not even partially. Refi the thing so you get a much lower payment and that will fix your DTI. It will also help your cash situation today as well since you won't have to continue paying 385 a month. Get it down to 100 a month and save that partial payoff amount plus save yourself the 285 a month for the next few months.

Maybe you pay more interest over the long run but so what. Assuming you're going to use the money to invest in real estate, you're going to make far more money off your investment properties than the little bit extra of interest you're going to pay......

Thats my 3 cents anyway.... (figured it was so long winded it was more than 2 cents worth). :-)