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I have my car loan as a part of my mortgage. Now, I want to buy a new house and I'm applying for a Proof of Funding (POF).

My salary is (relatively) good, so the limiting factor is my equity. When selling my house I'll (hopefully) be left with approximately USD 100,000. In my county, your equity must cover at least 15% of the worth of the house. So, with USD 100.000 I can buy a house worth USD 660,000.

Now, if I full finance my USD 20,000 car with a new loan (with higher interest), I will have an equity of USD 120,000. As far as I know, since the car is full financed, the car loan will not reduce my equity (that's why the interest rate is higher isn't it?).

So, if I divide my mortgage in two, my equity will be USD 120,000, and I will be able to buy a house for USD 800.000.

I know that a higher interest rate on the car is a bad thing, but a few % of 20,000 isn't much compared to the other sums, and compared to the benefit of buying the house I want.

Am I missing something here? Is this a smart thing to do?

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    You still owe $20000 so a bank may reduced the amount they're willing to loan you...on second thought, you might have the down payment, but your financial circumstances (AKA income) will govern whether you can maintain the ongoing mortgage payments and the total amount of money a bank will loan you.
    – mkennedy
    Jun 23, 2016 at 13:39
  • You mentioned "in your country", you should include your country in the tags. Things work differently in the US.
    – Pete B.
    Jun 23, 2016 at 14:20
  • I feel like you will have to answer your own question. In the US and Canada this would hurt more than help. Things seem different in Norway. How quickly can you earn 20K? Perhaps just pay down your mortgage that much.
    – Pete B.
    Jun 24, 2016 at 12:05
  • @PeteB.. it might hurt more than help, but I'm not sure. I've read that if you're buying a car and consider moving in the not so distant future, then you should not make the car loan part of the mortgage. Keep them separated. because that will give you better equity. I'm not sure if this applies if you've already done it. The premise is of course that you can pay the monthly costs.
    – Stewie Griffin
    Jun 24, 2016 at 12:30
  • The way I see it, but I might be missing something essential here. Suppose you have $50,000, and want to buy a car for $20.000. In theory, if you can take a car loan with no security (except the car). This shouldn't affect your equity when applying for a mortgage, you still have $50.000 cash. However, if you paid the car in cash, then your loan is lower, but you're stuck with only $30.000 in cash. Assuming you have enough to pay the monthly fees, the first option, keeping the car loan, seems like the best choice. I would think the same principle applies for the case I'm asking about.
    – Stewie Griffin
    Jun 24, 2016 at 12:39

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I guess I don't understand how you figure that taking out a car loan for $20k will result in adding $20k in equity. A car loan is a liability, not an asset like your $100k in cash. Besides, you don't get a dollar-for-dollar consideration when figuring a car's value against the loan it is encumbered by. In other words, the car is only worth what someone's willing to pay for it, not what your loan amount on it is.

Remember that taking on a loan will increase your debt-to-income ratio, which is always a factor when trying to obtain a mortgage. At the same time, taking on new debt just prior to shopping for a mortgage could make it more difficult to find a lender. Every time a credit report (hard inquiry) is run on you, it temporarily impacts your credit score. The only exception to this rule is when it comes to mortgages. In the U.S., the way it works is that once you start shopping for a mortgage with lenders, for the next 30 days, additional inquiries into your credit report for purposes of mortgage funding do not count against your credit score, so it's a "freebie" in a way. You can't use this to shop for any other kind of credit, but the purpose is to allow you a chance to shop for the best mortgage rate you can get without adversely impacting your credit.

In the end, my advice is to stop looking at how much house you can buy, and instead focus on a house with payments you can live with and afford. Trying to buy the most house based on what someone's willing to lend you leaves no room in the near-term for being able to borrow if the property has some repair needs, you want to furnish/upgrade it, or for any other unanticipated need which may arise that requires credit. Don't paint yourself into a corner. Just because you can borrow big doesn't mean you should borrow big.

I hope this helps.

Good luck!

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  • This is a good point (in the general sense): "Just because you can borrow big doesn't mean you should borrow big." A few comments: You can get as many credit reports as you like in Norway, it doesn't affect your credit score. This is a nice answer, but the case I'm presenting is that I can afford payments that are higher than what I can borrow, because my equity is low, but income is high (relatively speaking).
    – Stewie Griffin
    Jun 29, 2016 at 7:10
  • Because the car loan is part of the mortgage i can't use it as security, I simply have a higher mortgage. If I were to sell my car and buy a new/old car, I could take a separate car loan with security in the car itself. This would give me a lower mortgage, thus more cash when i sell the house. I was hoping this would help me... +1 btw =)
    – Stewie Griffin
    Jun 29, 2016 at 7:10

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