Connect with us

Bad Credit

How Does a Mortgage Affect an Auto Loan Approval?

Published

on

Auto Loan Approval Basics

When you apply for a car loan, the lender looks at the many aspects of your financial situation and overall stability. This means that the lender you’re applying with for auto financing is likely to consider your living situation, including your mortgage payment.

Applying for Vehicle Financing With a Mortgage

Lenders verify your residency when you apply for a car loan. Usually, you can prove your residency with a recent utility bill or a recent bank statement in your name. After you prove your residency, the lender takes a closer look at your monthly income compared to your other bills.

Your lender requires proof of income and details about your monthly bills, including your mortgage or rent payment. Proving you have a stable job and income isn’t enough to qualify for auto financing alone – you need to prove you have enough money in your budget to pay for the vehicle on top of your other expenses.

This means your mortgage can affect your car loan eligibility. If too much of your income is currently being used to pay for other credit, and you don’t have much wiggle room in your budget, then a lender may not approve you for an auto loan.

Your Mortgage Payment and DTI Ratio

To see how much income you left after your other bills and loans, lenders use what’s called the debt to income (DTI) ratio formula. It’s simply your loans and credit card payments divided by your monthly gross income, and the answer is expressed in a percentage. Your DTI ratio doesn’t include things such as utilities or groceries, but a mortgage payment is most definitely included in the formula.

Example:

Sally gets $2,000 in gross monthly income. Her mortgage, credit card minimum payment, and the estimated car payment and auto insurance total to $950 a month. Her DTI ratio would be 47.5%. This is found by dividing 950 by 2,000, and converting the decimal to a percentage.

How Does a Mortgage Affect an Auto Loan Approval?Now, car lenders have limits on how high your DTI ratio can be. For subprime auto lenders, or bad credit lenders, they typically require a DTI ratio that’s under 45% to 50% with the car payment and estimated insurance payment factored in. In Sally’s situation, she may or may not qualify for auto financing, since her DTI ratio is teetering right on the edge of being too high.

The lower your DTI ratio, the better your chance of qualifying for vehicle financing generally is. Car lenders look at your income and your current expenses because they don’t want to approve borrowers that are overextended financially. If taking on an auto loan pushes your budget to its limits, it’s a risk to the lender. They don’t want to set a borrower up for failure, so they prefer borrowers with low DTI ratios and enough wiggle room in their budgets that reassures them the car loan can be comfortably paid for.

auto loan approval

My Mortgage Payment Is High!

It’s not always easy to get a low mortgage payment, and perhaps your interest rate isn’t the best on the home loan, either.

If your high mortgage payment is what’s putting your DTI ratio over the top, then opting for a less expensive auto loan could be the answer. If your DTI ratio is higher than 50% without the car loan payment and insurance factored in, then you may need to consider a joint auto loan.

A joint car loan means sharing responsibility for the payments with someone else, typically a spouse. You and your spouse or life partner can pool your income together to meet income and DTI ratio requirements. You both get your name on the title, and your credit scores are considered separately (usually the lowest credit score is used to meet requirements). With a co-borrower, it’s easier to lower your DTI ratio because two incomes are used to meet one requirement.

If bringing a co-borrower along for the ride isn’t an option, then you may need to provide a source of additional income. Some auto lenders consider another source of income to lower your DTI ratio such as alimony, child support, or Social Security. This depends on the lender, but be sure to be upfront with them about your income and situation so they can work with your circumstances. Be prepared to prove you are receiving this additional income for the entire duration of the car loan.

Other Important Auto Loan Approval Requirements

Besides meeting income and DTI ratio requirements, auto lenders typically review your credit reports. Most traditional car lenders have higher credit score requirements, and if your credit score is around 660 or lower, you’re usually considered a bad credit borrower.

Many banks, credit unions, and captive lenders of automakers prefer borrowers with higher credit scores. Borrowers with the highest credit scores have a better chance of qualifying for vehicle financing and lower interest rates.

If your credit score isn’t great, it can mean a car loan denial – regardless of if you have enough available income to pay for the auto loan. However, there are lenders willing to assist borrowers with less than perfect credit, called subprime lenders.

These indirect lenders are signed up with special finance dealers. They often work with borrowers who’ve gone through bankruptcy, a past repossession, or those with tarnished credit histories. Subprime lenders do review your credit reports, but they also take into account the other factors of your creditworthiness such as your ability to repay the loan, your income and work stability, and your down payment amount.

Ready to Take the Leap Into Auto Financing?

Having enough income and being able to cover all of your current obligations, such as your mortgage, is important to car loan eligibility. However, your credit score holds a lot of weight too. If you’ve been struggling to find a lender that can work with your credit, then let us help point you in the right direction.

Here at Auto Credit Express, we’ve created an easier way to get connected to dealerships with bad credit lending resources. We’ve cultivated a nationwide network of dealers that are signed up with subprime lenders, and we want to look for one in your local area. Get started by filling out our free auto loan request form, and we’ll get to work looking for a dealership near you.

Source link

Continue Reading
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Bad Credit

Loans Bad Credit Online – Loans Bad Credit Online – Reforming India’s deposit insurance scheme | Fintech Zoom | Fintech Zoom

Published

on

Loans Bad Credit Online – Loans Bad Credit Online – Reforming India’s deposit insurance scheme | Fintech Zoom

Loans Bad Credit Online – Loans Bad Credit Online – Reforming India’s deposit insurance scheme | Fintech Zoom



Source link

Continue Reading

Bad Credit

Loans Bad Credit Online – Reforming India’s deposit insurance scheme | Fintech Zoom

Published

on

The government’s incentive to step in and bail out depositors when banks fail is clear from past experience.

By Anusha Chari & Amiyatosh Purnanandam

The failure of the Punjab and Maharashtra Co-operative Bank (PMC) in September 2019 shone a light on the limitations of India’s deposit insurance system. With over Rs 11,000 crore in deposits, PMC bank was one of the largest co-op banks. That the Deposit Insurance and Credit Guarantee Corporation (DICGC) insurance covered depositors, provided little solace when the realisation hit that the insurance amounted to a mere Rs 1 lakh per deposit.

The predicament of PMC depositors is, unfortunately, not an anomaly. Several bank failures over the years have severely strained RBI and central government resources. While co-operative banks account for a predominant share of failures, other prime examples include the Global Trust Bank and Yes Bank failures. These failures entail a direct cost to the taxpayer—the DICGC payment or a government bailout. More importantly, bank failures impose long-term indirect costs. They erode depositor confidence and threaten financial stability, presenting an urgent need for deposit insurance reform in the country.

A sound deposit insurance system requires balancing two opposing forces: maintaining depositor confidence while minimising deposit insurance’s direct and indirect costs. At one extreme, the regulator can insure all the deposits, which will undoubtedly strengthen depositor confidence. But such a system would be very expensive.

A bank with full deposit insurance has minimal incentive to be prudent while making loans. Taxpayers bear the losses in the eventuality that risky loans go bad. Depositors also have little incentive to be careful. They can simply make deposits in the banks offering high interest rates regardless of the risks these banks take on the lending side.

Boosting depositor confidence and reducing direct and indirect costs require careful structuring of both the quantity and pricing of deposit insurance. Some relatively quick and straightforward fixes could help alleviate the public’s mistrust while improving the deposit insurance framework’s efficiency.

India has made some progress on this front over the last couple of years. First, the insurance limit increased to `5 lakh in 2020. Second, the 2021 Union Budget amended the DICGC Act of 1961, allowing the immediate withdrawal of insured deposits without waiting for complete resolution. These are very welcome moves. Several additional steps could bring India’s deposit insurance system in line with best practices around the world. Even with the increased coverage limit, India remains an outlier, as the accompanying graphic shows.

The government’s incentive to step in and bail out depositors when banks fail is clear from past experience. However, these ex-post bailouts are costly. The bailout process also tends to be long, complicated, and uncertain, further eroding depositor confidence in the banking system. A better alternative would be to increase the deposit insurance limit substantially and, at the same time, charge the insured banks a risk-based premium for this insurance. Under the current flat-fee based system, the SBI pays144 the same premium to the DICGC—12 paise per 100 rupees of insured deposits—as does any other bank!

A risk-based approach will achieve two objectives. First, it will ensure that the deposit insurance fund of the DICGC has sufficient funds to make quick and timely repayments to depositors. Second, the risk-based premia will curb excessive risk-taking by banks, given that they will be required to pay a higher cost for taking on risk.

India is not alone in trying to address the issue of improving the efficiency of deposit insurance. The Federal Deposit Insurance Corporation (FDIC) recognizes that the regulatory framework governing deposit insurance is far from perfect and the United States is moving towards risk-based premia. The concept is similar to pricing car insurance premia according to the risk profile of the driver. The FDIC computes deposit insurance premia based on factors such as the bank’s capital position, asset quality, earnings, liquidity positions, and the types of deposits.

In India, too, banks can be placed into buckets or tiers along these different dimensions. The deposit premium can depend on these factors. It is easy to see that a bank with a worsening capital position and a high NPA ratio should pay a higher deposit insurance premium than a well-capitalized bank with a healthy lending portfolio. The idea is not dissimilar to a risky driver paying more for car insurance than a safe driver.

Risk-sensitive pricing can go hand-in-hand with the increase in the insured deposit coverage limits bringing India in line with its emerging market peers. In a credit-hungry country like India, these moves would build depositor confidence, possibly increasing the volume of deposits and achieving the happy result of the banking system channeling more savings to productive use.

Chari is professor of economics and finance, and director of the Modern Indian Studies Initiative, University of North Carolina at Chapel Hill and Purnanandam is the Michael Stark Professor of Finance at the Ross School of Business, University of Michigan

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.



Source link

Continue Reading

Bad Credit

5 Signs You’re Not Ready to Own a Home, According to a CFP

Published

on

If you buy through our links, we may earn money from affiliate partners. Learn more.

The housing market has boomed over the last year, despite a global pandemic and millions of Americans struggling to make ends meet. 

Many people are spending less on entertainment, clothing, travel, and other discretionary purchases during COVID. Federal student loan borrowers have seen temporary relief from their loan payments. These expenses will most likely rise again after the pandemic, and many people who committed to a new home with a large mortgage will struggle to keep up. 

I often speak with clients and prospective clients who want to buy a home before they have a strong financial foundation. Buying a home is not only one of the largest purchases you’ll make in your lifetime, but it’s also a huge commitment that’s extremely hard to undo if you have buyer’s remorse

It’s important to make a thoughtful, informed decision when it comes to a home purchase. Before you take the plunge into homeownership, check for these signs that you’re not quite ready to buy. 

1. You have credit card debt

Credit card debt can be a drain on your monthly budget, and when combined with student loans and a car loan, it can lead to high levels of stress. 

Generally, more debt means higher fixed expenses and little opportunity to save for long-term financial goals. Your financial situation will only get worse with the addition of a mortgage. I always recommend that clients be free of credit card or other high-interest debt before they consider buying a home. 

To rid yourself of credit card debt, take some time to get a good handle on your cash flow. Take an inventory of your spending over the last six to 12 months and see where you can cut back. From there, develop a realistic budget that includes aggressive payments to your credit cards. 

There are several strategies to help you knock out credit card debt fast. Regardless of the method you choose, stick with the plan and track your progress along the way. Once you pay off your credit cards, you can allocate your debt payments to savings, which can help you avoid this situation in the future.  

2. You have bad credit

Bad credit is not only a sign that you may not be ready to take on a mortgage, it can also signal a high risk to

mortgage lenders
. A high-risk status results in higher interest rates and more strict requirements to qualify for a loan. A mortgage is one of the largest loans you’ll take out in your lifetime, and if you get behind on payments, you could lose your home. 

Just as with credit card debt, bad credit could be a result of past financial mistakes. Dedicating the time to repair bad credit and improve your credit score will help you beyond purchasing your dream home. 

Start by pulling a recent credit report from each of the three credit bureaus so you can review it for errors. Dispute any errors, address past-due accounts, and bring your overall debt balances down. It’s helpful to learn what has a negative effect on your credit score so you can avoid these mistakes in the future. 

3. You don’t have an emergency fund (or an inadequate one)

If you’re unable to save for a rainy day, you probably don’t have enough money to buy a house. Owning a home is a big responsibility, and unexpected expenses pop up all the time. In addition, you could lose your job, have a medical emergency, or another unexpected expense unrelated to the home. Maintaining an emergency fund is a good sign that you have discipline and are prepared for the responsibility of homeownership.

Many financial experts recommend saving at least six months of living expenses in an emergency fund. If you have variable income, own a business, or own a house, you should save more. To build an emergency fund, set money aside from each paycheck and automate transfers to make the process easier. Give your emergency fund a boost when you receive lump sums such as bonuses or tax refunds. Start by saving one month of living expenses and build from there. 

4. You don’t have separate savings for your home

I always advise clients to set aside savings for a home in addition to an emergency fund. It’s a bad idea to start homeownership with no savings. Whether you have unexpected expenses related or unrelated to the home, having no emergency fund after a home purchase will lead to unnecessary stress — and possibly more debt. 

When purchasing a home, you’re responsible for a down payment and closing costs. While a 20% down payment is ideal to avoid private mortgage insurance, a down payment of at least 3.5% is typically required. Closing costs can range from 2 to 5% of the home’s value. 

Also, you will have moving costs, costs to spruce up your new place (like new furniture or light cosmetic updates), and any initial maintenance and repairs. Be sure to budget for these items to know how much to save on top of your emergency fund. It doesn’t hurt to boost your emergency fund, too, in preparation for homeownership. 

5. You have a low savings rate

It’s much easier to develop good savings habits before you have a lot of responsibilities. To get on track for financial independence, several studies show that you should save at least 15% of your income. The longer you wait, the more you’ll need to save. 

If your savings rate is low before you purchase a home, it will most likely worsen after becoming a homeowner. Even if your mortgage is similar to your rent, ongoing maintenance and repairs, higher utilities, and homeowners association fees can wreak havoc on your budget. 

Take a look at your current savings rate and see if you’re on track for financial independence. If you’re saving less than 15 to 20% of your income, work to improve your savings rate before you consider buying a home. A strong savings habit can help you build your home savings fund faster and ensure that a home purchase doesn’t impede your long-term financial goals. Finally, understand how much house you can afford so you can avoid being house poor. 

Buying a home can be rewarding, and when done the right way, it’s a way to build wealth. Before you decide to buy a home, it’s important to understand your numbers and ensure that you’re ready for the commitment. Without preparation, your dream home could be detrimental to your long-term financial goals.

Chloe A. Moore, CFP, is the founder of Financial Staples, a virtual, fee-only financial planning firm based in Atlanta, Georgia and serving clients nationwide.

Source link

Continue Reading

Trending