Can Your Commute Impact Your Mortgage?

It’s the cornerstone cliché of the real estate business: Location, location, location. Most homebuyers make it past the banality to implicitly understand they may pay a premium based on a property’s location. But few prospective borrowers consider a more subtle way location could crimp their budget and possibly their purchasing power – commuting costs. Some lenders may consider commuting expenses if you have to drive beyond a certain number of miles to work and back every day or week.

That monthly cost can factor into your overall debt-to-income ratio (DTI) and directly impact how much you can borrow. Policies and practices can vary by lender. Some won’t give commuting costs a second glance when evaluating what you can afford. But that doesn’t mean you can just forget them, too.

Smart homebuyers take these expenses into account, regardless of what’s required. Even if a longer commute won’t eat into your purchasing power, it could put a dent in your disposable income. And that could have serious repercussions for your monthly mortgage payment.

Calculating Commuting Costs

The one-two punch of housing and transportation continues to wallop American wallets. Combined housing and transportation expenses for households in the largest metro areas rose 44% from 2000 to 2010, according to a study from the Center for Housing Policy and the Center for Neighborhood Technology. But the costs associated with transportation don’t always enter the mortgage qualification picture.

Lenders may want to take a closer look only if you’re facing a particularly long commute. Nearly 600,000 full-time workers have a “megacommute” of at least 90 minutes and 50 miles, according to U.S. Census data. That’s a lot of wear and tear on your car every week. Spikes in gasoline prices or unexpected repairs can break a budget that’s already bending under the weight of other monthly expenses. A lender may have a cap on “free” miles, and any you drive in excess will come with a cost.

For example, let’s say the lender accepts a commute of no more than 50 miles each way per day, with every mile above valued at 50 cents. Continuing the example, the commute from your dream home to your work is 60 miles each way. That’s 10 miles over our fictional lender’s cap, which would come out to $5 in commuting costs for a one-way trip. The loan officer will do a little math, which would look something like this:

  • $5 x two trips = $10 per day
  • $10 x five-day workweek = $50 per week
  • $50 x 52 weeks = $2,600 per year
  • $2,600/12 = $216 per month

In this case, $216 is the monthly cost of your commute. Lenders will add that to your list of monthly expenses, which will in turn increase your DTI ratio. That may not make waves for some borrowers. But those with a borderline debt-and-income picture could be forced to seek a lower loan amount. Commuting costs could also shrink residual income, another important financial metric for VA and, soon, some FHA borrowers.

Estimate Costs

Odds are you don’t need to give up your dream of a house in the country. Commuting costs aren’t likely to play a direct underwriting role for most homebuyers. But consider running the numbers on your own to see how a new commute could affect your finances.

The U.S. Department of Housing and Urban Development maintains a housing and transportation calculator that can help you get a better handle on your projected costs. The last thing new homeowners need is the shock of unexpected expenses, especially when they’re easily anticipated.

Any new costs that could impact your monthly mortgage payment are worth a closer look.

[Editor's Note: Before you apply for a mortgage, it's important to check your credit reports to make sure they're accurate. You can get free credit reports once a year with each of the major credit bureaus. Also, you may want to check your credit scores to figure out which interest rate you're most likely to qualify for. You can do this with a free tool, like the Credit Report Card, which updates two of your scores every month and explains the biggest factors that are helping or hurting your scores.]

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