Marge and Homer Sampson have saved $95,000 toward the purchase of their first home. Allowing $7000 for legal costs and moving expenses, they have $88,000 available for a down payment.
a. Based only on a loan-to-value ratio of 80%, what is the maximum purchase price they can consider?
b. After thorough investigation, the Sampsons made a $360,000 offer on a townhouse subject to arranging financing. Next they met with their banker. With an $88,000 down payment, the Sampsons will need a mortgage loan of $272,000. The current interest rate on a five-year term fixed-rate mortgage with a 25-year amortization is 5.4% compounded semiannually. The banker gathered data for calculating the Sampsons’ GDS and TDS ratios. Annual property taxes will be $3000. Annual heating costs will be about $2400. The Sampsons make monthly payments of $800 on a car loan ($14,000 balance). Their gross monthly income is $7000. Calculate the GDS and TDS ratios for the Sampsons.
c. Note that the Sampsons meet the GDS criterion (≤32%) but exceed the TDS limit (40%). The item causing the problem is the $800 per month car payment. Suppose the Sampsons use $14,000 of their down-payment savings to pay off the car loan. They will still have enough to make the minimum down payment (0.2 × $60,000 = $72,000) but will have to increase the mortgage loan by $14,000 to $286,000. Re-calculate the GDS and TDS ratios. Do the Sampsons satisfy all three ratios by taking this approach?