Before applying for a mortgage loan, prospective borrowers will often pay down debts or pay off existing loans to increase their odds of approval. Usually, this process is a no-brainer, but there’s one type of financing that could act against those efforts: a car lease.

Here’s why.

Unlike car loans, a car lease can be trickier to workaround if you’re trying to pay off debt to qualify for a mortgage. Example: say you have a car lease payment at $500 per month. The balance is $8,000, which is the remainder of the lease. If you had a car loan with these exact terms, you could write a check to pay off the $8,000 obligation, and call it a day.

But that option doesn’t apply to a car lease. You can return the car and pay the balance; however, to qualify for a bigger mortgage, the lender will need to verify there is no obligation due for car. If you return the car, the mortgage company might ask what you’re going to drive instead — especially if you don’t work from home.

Should this scenario seem identical to your own, here are some options that might help you:

Transfer the lease

Your mortgage company should be fine with this option as long as you can show and verify the obligation is completely out of your name, and there is no obligation associated with it. Search online for options if your car dealer doesn’t have any transfer suggestions. Click here to learn more about transferring a car lease.

Consider your priorities

A good deal on your car lease may not matter if you are serious about buying a home, plain and simple. Ask yourself: which is more important, the house or the car?

Call your car dealer

Ask if they have options for getting out of the lease. You’ll need to make it very clear that you must be out of the lease obligation, no strings attached. Click here for tips on how to get out of your car lease.

Pay out

Return the car, pay the balance, and either buy a new vehicle in cash, removing any debt-to-income ratio predicament, or finance a car with a lower monthly payment. The important factor here is that the payments need to be reduced or removed completely if you want to maximize your buying power. Click here to learn more about car lease buyouts.

Send this to a friend