Can Abigail and Alexander Afford This Home Using the Monthly Income Loan Criterion? Next week, your friends Abigail and Alexander 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 $215,000. 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, Abigail and Alexander also collected the following information: Their financial records report a combined gross before-tax annual income or $145,000 and current (premortgage) installment loan, credit card, and car loan debt of $2,115 per month. Their property taxes and homeowner's insurance policy are expected to cost $2,150 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 $50,500 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: 10 Years 25 Years Interest Rate (%) 5.0 30 Years 53.6822 106.0655 5.5 108.5263 56.7789 58.4590 61.4087 64.4301 67.5207 6.0 111.0205 113.5480 Loan Maturity 15 Years 20 Years 79.0794 65.9956 81.7083 68.7887 84.3857 71.6431 87.1107 74.5573 89.8828 77.5299 92.7012 80.5593 95.5652 83.6440 98.4740 86.7823 101.4267 89.9726 59.9551 63.2065 6.5 7.0 116.1085 7.5 118.7018 66.5302 69.9215 73.3765 8.0 121.3276 123.9857 70.6779 73.8991 77.1816 80.5227 83.9196 87.3697 8.5 9.0 76.8913 80.4623 84.0854 87.7572 126.6758 129.3976 132.1507 9.5 10.0 104.4225 107.4605 93.2131 96.5022 90.8701 (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.) High Value Low Value Amount 30% 25% 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 7.5% NE 15 10
