1. (50 points includes a 10-point bonus) You are a loan officer and a first-time home buyer has requested that you help her determine how much she can afford to take out as a loan to help purchase a home. She is currently renting an apartment and has presented to you the following information for you to use in your analysis of her financial position:

Gross annual income: $56,000

Auto lease payment: $425/mth

Credit card minimum payment: $80/mth (Owes $4,200)

Student loan payments: $225/mth

Current utility payments: $135/mth on average

Health insurance costs: $200/mth

Auto insurance costs: $280/mth

Grocery/food costs: $400/mth

Dividend income from Stocks: $600/qtr

Gasoline costs: $225/mth

Miscellaneous living expenses: $500/mth

Estimated Federal Income Taxes: $4,000/year

Estimated State Income Taxes: $2,200/year

Estimated payroll taxes: $4,800/year

Property taxes for new home: $2,400 annual estimate

Homeowners insurance for new home: $600 annual estimate

The borrower has strong credit and has sufficient cash in the bank to pay for a down payment of 20% as well as any closing costs. The borrower has sufficient cash reserves to pay up to 2 discount points to lower her rate but only intends on staying in the home for 5 year or less.

Programs that are available for you to consider for the borrower include the following:

3/1 ARM at an initial rate of 3.0% (30-year amortization)

5/1 ARM at an initial rate of 3.25% (30-year amortization)

30-year fixed rate note at 4.0%

15-year fixed rate note at 3.5%

Each discount point paid would lower the 3/1 ARM and the 15-year Fixed Rate note by 0.375% and the 5/1 ARM and 30-year Fixed Rate note by 0.25%

Given the information above, please determine 1) how much of a loan would this borrower qualify for under each loan program above if the 28/36 rule is applied?, 2) which of the programs do you think would be best for this borrower, and why? and 3) (Here is the bonus for 10 points you can skip this part if you wish) where is there wiggle room in your calculations and what could you consider doing to help the borrower qualify for a larger loan?