Should I sell back a lease early in order to improve Debt-to-Income?
My wife and I just started the process of buying our first home. I've noticed DTI is very important as far as how much home you can get pre-approved for. Knowing this, I have started thinking of ways to improve my ratio. I will be the only one on the home loan (spouse will not have steady income since we are relocating).
With that being said, I am thinking about selling my leased 2019 Honda Clarity Plug-in Hybrid back to the Honda dealership I leased from. I've made the first 12 of 36 payments and the payoff amount showing on the account is 23,500. KBB has the car at 22k-25k (trade-in value). Our plan is to then buy the car back under my wife's name only. We love the car and have only put 7,000 miles on it over the first year. Just hoping for some guidance on best practices and whether or not the Honda dealership is the best place to start since the car has held its value and will continue to do so. I understand the Honda dealership will want to make a little money on the deal but I don't want to get burned. Thanks in advance!
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It sounds like you already know the answer to your question: doing what you're suggesting will get you the DTI you need to be approved for that particular mortgage. However, at the risk of offering advice you didn't ask for, I think there are a few caveats to this:
In response to your comment above, a finance guy at a dealership is pretty much always going to tell you that a deal can be made. Often, when people get out of a lease early, the dealership plays very aggressive games with the numbers in a way that makes things worse for you - often this involves rolling the costs of getting out of the lease into the new loan your wife would take out (this can include early termination fees and/or the actual lease payoff). So you end up with a loan you are immediately upside-down in. Regardless of if you can afford it or not, an upside-down loan is always a risk because if something happens to your collateral (your car is destroyed or stolen), you will be out of pocket for the difference. You should plan for this risk, if it applies - ideally either paying cash upfront to reduce the loan, or taking out GAP insurance. It sounds like you're already looking at numbers and doing your own research on the value of the car and the numbers involved in the lease, make sure you keep doing your due diligence and go in to that deal with eyes wide open. Don't let you emotional attachment to that particular vehicle create a tough situation for you, you may ultimately be best off terminating that lease and shopping for a different vehicle all together.
47% DTI is really high, and you may want to consider that the mortgage you're looking at will be a struggle to afford. This is a tough pill to swallow, because most people stay in homes for a long time, so you want to be able to get the home you really want now versus getting a cheaper home now. Of course, if you're not including your wife on the loan, but her income will be used to actually help pay the mortgage every month, then the good news is that your effective DTI won't actually be 47%. If you haven't done this yet, it makes sense to get your credit report and your wife's, and calculate your effective DTI including both incomes and all debts. If your wife doesn't have a lot of debt in her name, but has a reasonable income, your effective DTI may be much less than the 47% you are showing on paper. While you may not be able to include her income in the lender's calculations, you can effectively include it in your own decision making.
There's a whole range of mortgage products out there. You've mentioned VA loans, which require 41%. Conforming (fannie/freddie) loans currently require 43%. Many lenders offer other products which have different requirements, and there has been a recent push to either totally restructure or even abolish the use of DTI in mortgage underwriting. And, the "GSE Patch" currently in effect until 2021 basically means that even some products with "strict" limits can be written for people outside those limits in certain circumstances (which is probably why your lender is saying you'll qualify at 47% because your application looks good otherwise). Suffice to say, the answers that lender is giving you may be different than what you hear from a different lender who has different products, and all of the above may be very different in the next few years. If you're having trouble working with that lender, it may pay to shop around, or even to rent for a year and see how things shake out.
Sorry to be blunt, but it sounds like you can afford either the house or the car, but not both.
If you're losing one source of income, I'm skeptical that your wife can get a car loan in her name only, which may derail your plan altogether.
My advice would be to rent for a little while since 1) buying a house will be a strain on your finances, 2) you are moving to a new area and may want to get to know the area better before committing to a house. Then start saving money like crazy to make a good down payment on your first house.
She will only lose her income for the summer as we transition to a new duty station.
Then I would wait until she has income before buying - it will improve both your DTI and keep you from making bad refinancing decisions for a short-term benefit. Committing to a house that stretches your budget adds risk that many would not be willing to take.
dwizum's comments are spot on. From the tone of your question your DTI is high, so it is very risky to purchase a home. Your first step is to reduce consumer debt prior to buying a home. Doing what you suggest, unless you have 25K in cash, will not change your DTI significantly. What will change it, is reducing your consumer debt to zero, which should be your goal.
Its awesome that you love your car, but that comes with a cost. That cost maybe renting perpetually or at least for the next few years until you can actually own cars and not finance them. Leasing cars is, in most cases, the most expensive way to drive a car. Doing such gobbles up income that cannot be used for other purposes such as investing and home ownership.
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