11. Can I afford this home? - Part 1 Can Maria and Sam Afford This Home Using the Monthly Income Loan Criterion? Next week, your friends Maria and Sam want to apply to the Fifth State Bank for a mortgage loan. They are considering the purchase of a home that is expected to cost $125,000. Given your knowledge of personal finance, they've asked for your help in completing the Home Affordability Worksheet that follows. (Note: When completing the form, round each dollar amount to the nearest whole dollar.) To assist in the preparation of the worksheet, Maria and Sam also collected the following information: Their financial records report a combined gross before-tax annual income of $105,000 and current (premortgage) installment loan, credit card, and car loan debt of $1,531 per month. Their property taxes and homeowner's insurance policy are expected to cost $1,563 per year. Their best estimate of the interest rate on their mortgage is 7.5%, and they are interested in obtaining a 15-year loan. They have accumulated savings of $32,500 that can be used to satisfy the home's down payment and closing costs. The lender requires a minimum 20% down payment, and an affordability ratio that ranges from a minimum of 25% to a maximum of 30%. A table of monthly payments (necessary to repay a $10,000 loan) follows: Interest Rate (%) 5.0 5.5 6.0 6.5 7.0 7.5 8.0 8.5 9.0 9.5 10.0 10 Years 106.0655 20 Years 25 Years 65.9956 58.4590 68.7887 61.4087 71.6431 64.4301 113.5480 87.1107 74.5573 67.5207 116.1085 89.8828 77.5299 118.7018 92.7012 80.5593 121.3276 95.5652 83.6440 123.9857 98.4740 86.7823 126.6758 101.4267 89.9726 129.3976 104.4225 93.2131 132.1507 107.4605 96.5022 108.5263 Loan Maturity 15 Years 111.0205 79.0794 81.7083 84.3857 70.6779 73.8991 77.1816 80.5227 83.9196 87.3697 90.8701 30 Years 53.6822 56.7789 59.9551 63.2068 66.5302 69.9215 73.3765 76.8913 80.4623 84.0854 87.7572 (Note: Unless labeled differently, all of the following values represent dollar amounts. Also, some values calculated or used in the upper section of the table may also be used in the lower section.) Home Affordability Worksheet Based on Monthly Income 1. Annual income 2. Monthly income 3. Lender's monthly income affordability ratio 4. Maximum monthly mortgage payment (PITI) 5. Estimated monthly property tax and insurance payment 6. Maximum monthly loan payment (P and I only) 7. Expected interest rate 8. Planned loan maturity (years) 9. Mortgage payment factor per $10,000 (from the Loan Maturity table) 10. Maximum loan based on monthly income 11. Funds Available for a Down Payment and Closing Costs 12. Required (20%) Down Payment 13. Maximum Purchase Price Based on Monthly Income High Value 30% Low Value 25% Amount 7.5% 15 Given these results, which statement regarding Maria and Sam's mortgage qualification process and their purchase of their $125,000 target home is true? Maria and Sam qualify to purchase their $125,000 target home according to the Monthly Income Affordability Worksheet criterion. O Maria and Sam do not qualify to purchase their $125,000 target home according to the Monthly Income Affordability Worksheet criterion
