Will getting small auto loan disqualify me for new mortgage soon?

Question

I have a dilemma:

• I have a 15 year old BMW that now costs more in upcoming maintenance than the car is worth so it's time to get rid of it. I plan on getting a modest, 3+ year old used vehicle from around $12,000 or less but in an ideal world I would finance it only to have cash on hand for a rental property.
• I want to qualify for my first investment property starting this summer ideally.

With that in mind, will taking on a new auto loan within a few months of seeking a home loan automatically scare off the underwriter regardless of the fact that the auto loan is about 10% of my annual salary, I have no other debts and my credit score is ~790?

The payment shouldn't increase my debt-to-income ratio much because of my high salary and I am quite frugal in that I save 50%+ of my income and have little other expenses other than rent so from my perspective I'm still safe.

Of course, underwriters have different opinions so I don't want to screw my future self by financing an auto to stay liquid only to find out in a few months they would want me to pay it off before getting a mortgage. I am torn as to whether pay cash for a cheaper, older car or finance for a slightly less worn car.

Dakotah P. · Answer

Chris Mason I was a self-employed contractor but am now an employee which should help going forward. I need to take Brandon Turner's tips for presenting my own worthiness to a lender so they give solutions back like you do rather than a binary yes or no response like they did last time around.

Albert Bui · Answer

Sounds good just try to find properties where acquisition + rehab will be at 75% of market value or lower then you're surely to have a higher chance of success. If you follow that model in most markets you'd have very good positive cash flow and you can take out most or all of your original investment post acquisition.

Dakotah P. · Answer

@Marissa Mallamo I would be seeking lending for an investment property only, not for a personal residence, so of course my personal rent will be considered with the mortgage payment in my personal expense ratios.

@Albert Bui I live near West Hollywood city limits but my rent hasn't been raised much in years so I'm paying below market rate so bad landlords FTW! I should mention I'm seeking properties out of state where my family lives in the Inland Northwest so I'm looking to qualify for relatively small loans. Thanks for your insight.

Albert Bui · Answer

HI Dakotah,

Its sounds like  from what you've mentioned in your scenario that you wont have very much issues qualifying from an income perspective since you're saving 50%+ of your income and you live in West Hollywood that means your income is probably $$$ more than sufficient since West Hollywood is one of the most expensive areas in CA other than south bay, santa monica, La jolla, rancho santa fe, Newport beach and couple other areas in CA.

To figure out how much impact this car will have on your ability to qualify you can use a general gauge that every $100 dollars of car payment will lower your ability to qualify by about 20,000 in loan amount in general. If you're not buying up to the maximum you can qualify for you should be fine.

If you'd like to be in a ready position you could always get your credit, income, and assets reviewed and planned for in advance, because a loan is basically compromised of those three areas.

LIke Chris mentions above though, if you buy a property that positively cash flows using the formula of 75% of gross income minus your mortgage payment per month (PITIA - principal/interest/tax/insurance/assessments)  = a positive number then "yes," your DTI will go down each time you buy another property. The issue lies in the fact that REI's (real estate investors) tend to claim and write off a lot when it comes to tax time so after they purchase a property they came their rental in a manner which actually makes DTI worst often times.

A well formulated loan approval and mortgage plan can take a lot of risk out of investing especially if you're using BRRR - buy-renovate-refi-repeat with hard money, private money, are trying to cash out to obtain your seed capital again, and or are looking to ensure a smooth exit strategy.

I always recommend multiple exit strategies to mitigate investor/borrower risk.

Hope that helps.

Chris Mason · Answer

Feel free to reach out to me if you'd like to chat. My license says "State of California" on it, not "Oakland."

Chris Mason · Answer

(1) Is it self employment or are you an hourly/salaried employee? If hourly, do you consistently work 40+ hours a week without any unpaid time off?

(2) For good credit scenarios, often one year of self employment reflected on tax returns is required by Freddie Mac. Some lenders are Fannie Mae only. I've got a deal, that was formally approved at like 4:58 on Friday actually, where that was the solution to the wife disputing a bunch of things on her credit at the last minute (can't get a mortgage with any disputes on credit, period) -- his 2015 self employed tax returns were way sexier than his 2014, so boom let's just do Freddie Mac and look only at 2015 (12 month average, not 24), poof he suddenly has the calculated income to support the entire mortgage, bazinga take the wife (and her credit report) off the loan, im-out-of-batman-words closing in 2 weeks.

Dakotah P. · Answer

It sounds like I won't exactly be persona non grata if I take on a little debt within a few months as long as I can afford it so that's good. One additional consideration is I started a new job (but same profession) less than two months ago and I will be speaking with lenders around my 6mo mark and I think between that and potentially an auto loan it might give them reason to say I need to be at my job longer.

@Zach Mitchell I considered speaking with a lender earlier about this but I tend to not trust anything that a front-end mortgage banker says since they tend to tell you whatever you want to hear. A year ago I went through the whole process because of one's enthusiasm only to find out I was denied because I had less than two years of self-employment tax returns. That moron could have just told me that rule without wasting hours of my time and the underwriters.

Thanks all for your insights, this is helpful.

Chris Mason · Answer

Any new fixed term debt will hurt your FICO score until you prove that you can manage that new obligation on top of your existing obligations, and the only way to do that is to make six or so on-time payments.

In your case, with a 790 FICO? Who cares. It'll drop from 790 to like 750. Anything >740 is the best interest rate pricing and all the same category.

For your DTI, from what you've said and assuming you buy a good cash-flow positive property, we generally aren't worried about DTI for real estate investors. If you're doing the right things (honest when you file taxes, buying good properties, etc) as an REI, your DTI will go down and down with each property you buy.

Cash to close is more frequently the limiting factor with good real estate investors. I've got a few REI out there that I've taught how to calculate their cash to close and PITI Reserve requirements, and I've taught them how to season funds... they get preapproval letters with my signature already affixed, with purchase price and down payment blank. I know they aren't going to waste my time, so why would I waste theirs? Here's a blank check with my signature on it, don't fck me.

Bill Schrimpf · Answer

Based on what you said, the auto loan likely wouldn't be much of a factor, particularly if your fico is 790 and your DTI is low.  The best thing to do is go to a local credit union or bank and get a mortgage pre approval.  This does 2 things, educates you and establish a relationship with a lending institution.  They probably have better auto financing  too.

Good luck