If you know you have a new mortgage coming up and you plan on leasing a new car, is it wise to pay the entire lease up front?
I recently leased a 2016 Toyota Sienna XLE. After leasing the car I met with a mortgage agent to ask about Debt-to-Income ratio (DTI) calculation. I told him I could make 1 lump payment in lieu all my remaining monthly lease payments, so my monthly lease payments would not be calculated in my DTI. He informed me that the monthly lease payments will still be calculated in my DTI because they show up on my credit report, even if I pay off the rest of the lease.
The lease will show up on your credit report till the car is returned. However you can get a letter from your financial company saying that there are no monthly payments and there is nothing to count against your DTI.
Alternatively you can just buy the car off by paying the payout amount but that will trigger sales tax on that amount but that will remove it from your credit report as the car is paid off. Once your loan is done you can always refi the car with your local credit union.
This however will only work if you plan to keep your sienna for a long time and not sell it off in few years as that would not be financially viable after paying taxes and other costs.
I was in a similar situation when refinancing 3 years ago. I was told that, even if I prepaid the entire lease, that it would still be a problem for DTI calculation because it still shows up on the credit report, and you are still responsible for the full value of the car if something were to happen to it. I thought that was BS as I had car insurance and GAP insurance for that eventuality.
I was trying, but the GAP insurance was prepaid and I offered to prepay the regular car insurance as well. They had an excuse for everything I offered to do.
Most of these mortgages get sold in the secondary market and have strict requirements. That could work if you find a bank that will hold it on its books, but with lower rate envinronment unless its adjustable rate, no bank would like the risk.
So you’re telling me that if you lease a car and pay all lease payments up front, meaning your credit report shows a monthly lease payment of $0, the bank will ding your DTI because you are financially responsible if the car gets totalled?
What dollar amount do you use in your DTI calculation?
I’m not saying that’s the case in all situations, but it was in mine. I was in the middle of a refinance when some jackass teenager who was texting and driving destroyed my old BMW. I was in the process of trying to lease a new one, but had to get by with a rental until after the refinance was complete. I’m not sure what dollar amount was used, because they told me there was no point in even trying.
If you payoff the lease and get a letter that you have no payments until maturation of the lease, the underwriter should remove the payment from your DTI by using a Credit Supplement.
Another way to remove the payment from your DTI is to show that someone else is making the payment. Usually they will ask for 12 month payment history.
And, if you have 8 or less payments left, they should not include it in your DTI.
I’ve been in the mortgage biz for 15 years - website is: realty.fund
I am a mortgage broker. The car lease will show up on your credit report. If you pay the entire lease payments up front and have the letter from the finance company that states you do not have a monthly payment on the vehicle, then you are fine. We can manually remove that.
I always love these “from the lender’s perspective” comments. From the lender’s perspective, what if I go and finance a car after I get the mortgage? Leasing company still won’t allow lapse in insurance even if you baloon’ed the payments in the beginning, because they need coverage for the residual. Stop perpetuating these lame rationalizations and call a spade a spade: underwriting rules are too crude to accommodate for these situations, even though it doesn’t make sense to count a paid-off lease towards DTI, they’re not about to come up with a more complex system for evaluating your situation - much easier to just say “no”.
Another favorite of mine “well, if you leased this one, you’re just going to lease another one, you’re not going to walk”. I’m pretty sure if you’ve financed a car, you’re also going to finance another one. So how is a paid off lease different than the period where you’ve paid off your old car and haven’t traded it in and financed the new one yet?
I was in a similar situation a couple of years ago. The numbers managed to work out in the end for me but I was curious… rather than a full prepaid lease, what if you put down a large amount and had a tiny monthly?
