In a recent discussion I encountered elsewhere, I came across a point of contention that piqued my interest and led me to wonder if this situation could provide some insightful information.
It was mentioned that in the case of a 3-year lease with an early buy-out option, for instance, after 3 months, the monthly payments would still be factored into the Debt-to-Income (DTI) ratio until the original lease expiration date, if the owner decides to apply for a mortgage loan.
On the other hand, for a 3-year auto loan, an early payoff would immediately remove the monthly payments from the DTI calculation.
I’m curious to know if this is accurate. If so, what could be the underlying rationale? Once the lease is terminated, there aren’t any financial obligations tied to it. Therefore, it seems strange that it would still impact the DTI ratio. Could you provide some clarification on this matter?
Presumably with the lease, the presumption is that you will continue to need a vehicle after the lease expires, so youre highly likely to lease another vehicle and take on that expense vs paying off a purchase, you still have a vehicle.
Thanks for the reply. For curiosity, is this your speculation, or some common opinions of loan agents?
Actually, after the early buy-out, the car has been bought just like it was bought at the very beginning. What would be the difference between a purchase 3 months ago vs a purchase yesterday, when a mortgage loan application is reviewed? Is the loan software just not smart to enough to handle such situation?
Oh, financing won’t help here, as auto loan would also be included in DTI.
I think the only situation to discuss is that the car is leased for 3 months, and then bought out with cash. In this case, the DTI should exclude the lease monthly payment, as it doesn’t exist any more.
This doesn’t make sense. After lease, owner may buy out the car, or buy another car, instead of having another lease.
I actually had this situation happen to me, I sold my Nissan to Carmax when that was still a thing. That lease was $350 a month. I then got my current ioniq for $240 a month (those were the days huh?) Both showed up as monthly obligations to the loan officer, I just had to write a letter and show that the Nissan was sold and not an obligation anymore, and they took that off the DTI. Unfortunately with home prices and car prices these days, a lot of people are stretched thin and loan companies have their own interest at heart and need to be sure to cover their own behinds. You may be able to get a letter from the bank you bought the car out from showing there is no balance and see if that will suffice.
I have seen it treated that way for early lease payoffs in the context of someone paid the extra lease payments, not specifically bought it out to keep.
I suspect as max_g said, it really comes down to how the software is written. It probably isnt unusual for people to prepay the remaining lease cost to try to game the dti situation, so they probably just look for that in general and not all the nuanced variations.
Lease payments must be considered as recurring monthly debt obligations regardless of the number of months remaining on the lease. This is because the expiration of a lease agreement for rental housing or an automobile typically leads to either a new lease agreement, the buyout of the existing lease, or the purchase of a new vehicle or house.
There could be variations on this with other investors (and portfolio lenders), but the GSEs are the big dogs.
Once it’s paid off and closed, there are no more lease payments left.