To buy or to lease a car – that is the question! When it comes to an automobile, in the end, it’s going to be up to you (when it comes to a home, however, you should definitely prequalify and purchase).

Yet, have you ever been curious about whether buying or leasing a car has an impact on applying for a VA home loan or conventional mortgage loan? We look at the differences between buying and leasing a car and how they affect debt-to-income ratio, credit scores, and buying a home.

Debt-to-Income Ratios & Car Loans/Leases

DTI calculates your monthly debt obligations plus your expected monthly housing expense, divided by your gross monthly income. 

Monthly Debt Obligations + Expected Monthly Housing Expense / Gross Monthly Income

Typically, max DTI for a conventional and VA loan would be in the 40-50% range.

Now, how does DTI relate to having an auto loan or leasing? Higher monthly debts will affect the size of your loan and the mortgage interest rate. Therefore, a monthly car payment is considered a monthly debt obligation and will be calculated for DTI. According to Experian, the average monthly lease payment is $540 and the average monthly loan payment is $667. 

Based on those amounts, a car lease payment would take up less of your monthly income. Yet, the debt will continue as long as you lease, because you will never fully own the car. Whereas an auto loan has a definitive end date where you will own your car outright. Thus, eliminating that monthly payment at that point in time.

Are car loan payments always considered debt?

Here’s an interesting factoid! We will include your lease or auto loan payment in your monthly debt obligations when we calculate your debt-to-income ratio. However, there is a time when an auto loan is not considered debt. The time when we can omit liability is when you have 10 or less payments left on the loan. It goes without saying that if you own a car or pay cash for a car, you won’t have a monthly payment and no car debt to report.

Credit Scores & Car Loans/Leases

With both an auto lease or auto loan, your credit score will be affected. For example, you may see a hit or reduction in your credit score at the start of an auto lease. Yet, according to, regular on-time payments on an auto lease will build your credit. Since auto leases usually have penalties for paying off the lease early, your credit score could be impacted negatively in the way it’s reported as a closed account on your credit report.

For an auto loan, paying down the loan balance will strengthen your credit and thus, your score. Higher credit scores lead to an easier VA home loan application experience, pre-approval amount, and mortgage rates. However, we have experience helping buyers with low credit scores achieve better ones through our resources and guidance. Homeownership is an endeavor not to be dismayed by a low credit score.

Home Buying & Car Loans/Leases

Here are some key points to keep in mind about whether to buy or lease a car BEFORE and AFTER you apply for a VA loan:

  • Lower monthly car payments or have no car payment to strengthen your mortgage application.
  • Paying off an auto loan is an eventual asset to a mortgage lender whereas leasing a car looks like a continuous rental payment.
  • 10 or less payments left on an auto loan will not be counted towards your debt-to-income ratio.
  • Do not finance a car loan after applying for a mortgage loan or take out any new line of credit. It will delay the home buying process and possibly jeopardize previous affordability. See more in our “Home Buying Do’s & Don’ts During the Loan Process” guide

As you can see, there are various pros and cons to both car loans and leasing. While both will count toward your DTI, it’s important to weigh your present and future debt obligations when taking on a monthly mortgage payment. We hope some of this information helps you make a decision to either buy or lease a car before you apply for a VA home loan or conventional loan. 

Contact us anytime here at Hawaii VA Loans to get pre-qualified for your no down payment VA home loan!