12. Can I afford this home? - Part 2

Can Olivia and Anthony Afford This Home Using the Installment Debt Loan Criterion?

Next week, your friends Olivia and Anthony want to apply to the Third Universal Bank for a mortgage loan. They are considering the purchase of a home that is expected to cost $185,000. 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, Olivia and Anthony also collected the following information:

Their financial records report a combined gross before-tax annual income of $125,000 and current (pre-mortgage) installment loan, credit card, and car loan debt of $1,823 per month.Their property taxes and homeowner's insurance policy are expected to cost $1,850 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 $44,500 that can be used to satisfy the home's 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%.A table of monthly payments (necessary to repay a $10,000 loan) follows.

Loan MaturityInterest Rate (%)10 Year15 Year20 Year25 Year30 Year5.0106.065579.079465.995658.459053.68225.5108.526381.708368.788761.408756.77896.0111.020584.385771.643164.430159.95516.5113.548087.110774.557367.520763.20687.0116.108589.882877.529970.677966.53027.5118.701892.701280.559373.899169.92158.0121.327695.565283.644077.181673.37658.5123.985798.474086.782380.522776.89139.0126.6758101.426789.972683.919680.46239.5129.3976104.422593.213187.369784.085410.0132.1507107.460596.502290.870187.7572Note: 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. Remember to round each dollar amount to the nearest whole dollar.

Home Affordability Worksheet

Based on Installment Payments and Monthly IncomeHigh ValueLow ValueAmount1. Annual income2. Monthly income3. Existing monthly installment payments4. Existing monthly installment payments as percentage of monthly income (%)%5. Lender's monthly installment loan affordability ratio38%33%6. Maximum amount of total affordable installment debt7. Maximum monthly mortgage payment (PITI) affordable based on installment loan ratio8. Estimated monthly property tax and insurance payment9. Maximum monthly loan payment (P and I only)10. Expected interest rate7.5%11. Planned loan maturity (years)1512. 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 payment15. Maximum home price based on installment loan ratio

Given these results, which statement regarding Olivia and Anthony's mortgage qualification process and their purchase of their $185,000 target home is true?

Olivia and Anthony do not qualify to purchase their $185,000 target home according to the Installment Debt Affordability Worksheet criterion.

Olivia and Anthony qualify to purchase their $185,000 target home according to the Installment Debt Affordability Worksheet criterion.