12. Can I afford this home? - Part 2

Can Kyoko and Jacques afford this home using the installment debt loan criterion?

Next week, your friends Kyoko and Jacques 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, theyve asked for your help in completing the Home Affordability Worksheet that follows.

To assist in the preparation of the worksheet, Kyoko and Jacques also collected the following information:

	Their financial records report a combined gross before-tax annual income of $105,000 and current (pre-mortgage) installment loan, credit card, and car loan debt of $1,531 per month.
	Their property taxes and homeowners insurance policy are expected to cost $2,813 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 homes down payment and closing costs.
	The lender requires a minimum 20% down payment, and installment loan affordability ratios that range from a minimum of 33% to a maximum of 38%.

Use either the table of monthly payments (necessary to repay a $10,000 loan), your financial calculator, or the maximum affordable mortgage loan formula to complete the following home affordability worksheet. (Note: When completing the form, round each dollar amount to the nearest whole dollar. 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. Round your percentage answer to two decimal places.)

Monthly Payments Factors

Maximum Affordable Mortgage Loan Formula

Loan Maturity

Interest Rate (%)	10 Years	15 Years	20 Years	25 Years	30 Years
5.0	106.0655	79.0794	65.9956	58.4590	53.6822
5.5	108.5263	81.7083	68.7887	61.4087	56.7789
6.0	111.0205	84.3857	71.6431	64.4301	59.9551
6.5	113.5480	87.1107	74.5573	67.5207	63.2068
7.0	116.1085	89.8828	77.5299	70.6779	66.5302
7.5	118.7018	92.7012	80.5593	73.8991	69.9215
8.0	121.3276	95.5652	83.6440	77.1816	73.3765
8.5	123.9857	98.4740	86.7823	80.5227	76.8913
9.0	126.6758	101.4267	89.9726	83.9196	80.4623
9.5	129.3976	104.4225	93.2131	87.3697	84.0854
10.0	132.1507	107.4605	96.5022	90.8701	87.7572

Home Affordability Worksheet
Based on Installment Payments and Monthly Income	High Value	Low Value	Amount
1. Annual income
2. Monthly income
3. Existing monthly installment payments
4. Existing monthly installment payments as percentage of monthly income (%)			%
5. Lenders monthly installment loan affordability ratio	38%	33%
6. Maximum amount of total affordable installment debt
7. Maximum monthly mortgage payment (PITI) affordable based on installment loan ratio
8. Estimated monthly property tax and insurance payment
9. Maximum monthly loan payment (P and I only)
10. Expected interest rate			7.5%
11. Planned loan maturity (years)			15
12. Mortgage payment factor per $10,000 (from the Loan Maturity table)
13. Maximum loan based on mortgage payment factor (from the Loan Maturity table)
14. Required (20%) down payment
15. Maximum home price based on installment loan ratio

Given these results, which statement regarding Kyoko and Jacquess mortgage qualification process and the purchase of their $125,000 target home is true?

Kyoko and Jacques qualify to purchase their $125,000 target home according to the Installment Debt Affordability Worksheet criterion.

Kyoko and Jacques do not qualify to purchase their $125,000 target home according to the Installment Debt Affordability Worksheet criterion.