Can I Afford this Home?

Prior to making a mortgage loan, lenders will require a potential borrower to qualify and demonstrate an acceptable credit record and sufficient incom to support the loan's scheduled payments. This credit evaluation relies on two basic criteria to determine maximum payment amount, and, relatedly, the maximum total loan and house amount that the borrower can afford.

Generally, the guidelines specify a range for each criterion. This practice provides each lender with the flexibility to adapt its requirements to a particular loan applicant.

The two borrowing criteria used by most lending institutions are as follows:

The $,$ or maximum allowable housing expense ratio, which maintains that the applicant's total expenditures for housing $($as measured by a year's worth of PITI payments$),$ cannot exceed $25\%-29\%$ of the borrower's annual gross, or income.

The $,$ or maximum allowable monthly housing expense and long$-$term debt ratio, which maintailis that the total of all applicant's monthly gross income.

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.$ To prevent their possible embarrassment at the bank, and given your knowledge of personal finance, they've asked you to help answer the following questions by completing the home affordability worksheet that follows: