Can Cheyenne and Michael Afford This Home Using the Monthly Income Loan Criterion?

Next week, your friends Cheyenne and Michael 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 $245,000. Given your knowledge of personal finance, theyve 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, Cheyenne and Michael also collected the following information:

	Their financial records report a combined gross before-tax annual income of $145,000 and current (premortgage) installment loan, credit card, and car loan debt of $2,115 per month.
	Their property taxes and homeowners insurance policy are expected to cost $4,288 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 $56,500 that can be used to satisfy the homes 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:

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

(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	High Value	Low Value	Amount
1. Annual income
2. Monthly income
3. Lenders monthly income affordability ratio	30%	25%
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			7.5%
8. Planned loan maturity (years)			15
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

Given these results, which statement regarding Cheyenne and Michaels mortgage qualification process and their purchase of their $245,000 target home is true?

Cheyenne and Michael do not qualify to purchase their $245,000 target home according to the Monthly Income Affordability Worksheet criterion.

Cheyenne and Michael qualify to purchase their $245,000 target home according to the Monthly Income Affordability Worksheet criterion.