Most people think of car payments and mortgage payments as completely separate — one gets you from A to B, the other gives you a place to live. But when it comes to mortgage qualification, your car payment can dramatically reduce how much home you can afford.
Let’s break down exactly how that happens and why that $700 monthly payment could be costing you $160,000 or more in buying power.
The Math Behind It
Mortgage lenders qualify you based on something called the Total Debt Service (TDS) ratio — a percentage of your gross income that can go toward all your debts (including your mortgage, property taxes, heat, and other loans).
Here’s an example:
- Gross monthly income: $7,000
- Maximum TDS ratio: 44%
- Total allowable monthly debts: $7,000 × 44% = $3,080
Now let’s compare two scenarios.
🟢 Without a Car Payment
- Property taxes + heat: $400/month
- Remaining for mortgage: $3,080 – $400 = $2,680/month
- At 4.14% (25-year amortization) → Max Mortgage: ≈ $625,000
🔴 With a $700 Car Payment
- Property taxes + heat: $400/month
- Car payment: $700/month
- Remaining for mortgage: $3,080 – $400 – $700 = $1,980/month
- At 4.14% (25-year amortization) → Max Mortgage: ≈ $462,000
✅ Impact: $700/month in car payments reduces your home-buying power by roughly $160,000.
Why This Happens
Every lender uses debt ratios to assess risk and ensure you’re not overextended. They don’t just look at your total income — they focus on your ability to manage debt.
A car loan, even if it feels manageable, counts as a fixed debt against your income .So while you may think, “It’s just $700 a month,” the lender sees a tighter cash-flow picture and a smaller buffer for mortgage payments.
It’s Not Just the Payment — It’s the Timing
Here’s what many buyers don’t realize: If you pay off or refinance your vehicle loan before applying for your mortgage, that extra room in your ratios immediately boosts your buying power.
Even trading down to a more affordable vehicle, or leasing strategically with a lower payment, can make a big difference in your pre-approval amount.
Smart Moves Before You Buy a Home
If you’re planning to buy a home in the next 6–12 months, consider these steps:
- Re-evaluate your car payment. Can you pay it off, refinance, or sell the vehicle to free up cash flow?
- Avoid taking on new vehicle debt before mortgage qualification. Even if the dealer says, “You’re approved,” your lender might not agree.
- Get pre-approved early. A pre-approval gives you a clear sense of what you can afford now — and how much more you could afford if you reduced your monthly debts.
- Work with a mortgage professional. We can model your exact numbers and show you how changing your debts changes your buying power in real dollars.
The Bottom Line
Your car might look great in the driveway, but it could be keeping you from owning the driveway itself.
If you’re serious about buying a home, every monthly payment matters. That $700 car payment could be costing you your dream home — or the flexibility to buy in your preferred neighbourhood.
Let’s look at your numbers and see how to structure your debt so you can maximize your buying power when the time is right.