if possible please use the work sheets provided and notbign is missing for the problems. Thank you very much.

Case Study: Conventional Financing Rick and Teresa Cortina are hoping to buy their first home, and they're going to get preapproved for financing (by a lender) before they start house shopping in earnest. To give you some insight into the underwriting process, let's consider how much money the Cortinas might be qualified to borrow and how that translates into a suitable price range for their search. Based on the financial information shown below, answer the questions that follow. There are worksheets at the end of the case study that you can use for the calculations. Current housing expense The Cortinas have lived in the same rental house for five years; for the past two years, their rent has been $3,450 per month. Employment Teresa has been a paralegal at Tarman & Andrews, a law firm, for two and a half years. Rick has been a sales manager at Acme Tire, Inc. for Back to page 3 Page 373 four years. Income Rick earns a monthly salary of $2,400, plus commissions. His com- missions have averaged $2,985 per month for the past two years. Teresa earns $30.50 per hour for a full-time (40-hour) work week. Taxes (monthly figures) Rick's taxes: Federal income taxes: $570 State income taxes: $218 Social Security/Medicare: $306 Teresa's taxes: Federal income taxes: $563 State income taxes: $212 Social Security/Medicare: $327 Credit scores from the three major agencies Rick: 677,685,687 Teresa: 746, 750, 752 Assets Savings account: $87,000 Miscellaneous (cars, jewelry, etc.): $63,000 Liabilities (monthly payments) Car loan: $417 (30 payments remaining) Car loan: $323 (17 payments remaining) Installment contract: $183 (15 payments remaining) Credit cards: $165 (minimum payments) Student loan: $98 (8 payments remaining) Student loan: $155 (12 payments remaining) Interest rates and fees (30-year conventional loans) In the area where the Cortinas live, lenders are typically charging bor- rowers with credit histories like theirs the following rates and fees. Assume that the applicable loan-level price adjustment(s) are reflected in these interest rates, they won't be charged separately. Fixed-rate loans LTV 90% or less: 5.5% interest LTV over 90%: 6.0% interest ARMS LTV 90% or less: 4.5% interest LTV over 90%: currently unavailable in the Cortinas' area Discount points In the current market, if discount points are paid on either a fixed- rate loan or an ARM, cach point reduces the interest rate by one- quarter of one percent (0.25%). housing expense (the PITI payment) they can qualify for if those two standard ratios are applied. Then, to calculate the maximum principal and interest payment, assume that 15% of their total mortgage pay- ment will go toward property taxes and hazard insurance. If mortgage insurance is required, assume that an additional 10% of their total mortgage payment will be used for that. (These percentages provide only a rough approximation for the purposes of this exercise.) Next, just for the sake of comparison, calculate the Cortinas' maxi- mum housing expense by applying a 45% debt to income ratio to their stable monthly income. (Assume that 25% of their total payment will go toward property taxes, hazard insurance, and mortgage insur ance.) Also, calculate what their housing expense to income ratio would be with that payment amount. Briefly describe under what cir- cumstances, if any, the Cortinas might qualify for a monthly housing expense that large. (Consider the difference between income ratios applied in manual underwriting and automated underwriting, and also whether compensating factors would make a difference.) Also describe some circumstances that would make it more likely that the Cortinas' maximum payment would be determined by the 36% and 28% income ratios instead. 1. Use the "lower of two, middle of three" rule to select a credit score for each of the Cortinas. Which of those two scores will be the indicator score (representative score) for their application? 2. What's their stable monthly income? (Round the answer down to the next dollar.) 3. When the Cortinas apply for preapproval, what's the maximum monthly principal and interest payment they could expect to qualify for in each of the following cases? a) They're preapproved for Loan A, a fixed-rate conventional loan with an 80% LTV. b) They're preapproved for Loan B, a conventional ARM with a 90% LTV. c) They're preapproved for Loan C, a fixed-rate conventional loan with a 95% LTV. For each of these loans, first use the 36% debt to income ratio and the 28% housing expense to income ratio to calculate the largest 4. With the maximum principal and interest payment you calculated for Question 3 using the 36% and 28% ratios, the Cortinas could qualify for the maximum loan amounts shown below. For each loan, state the interest rate that would be charged, taking any discount points into account. (Refer back to the rates listed at the beginning of the case study, each point reduces the listed rate by 0.25%.) Then use the loan-to-value ratio to calculate an estimated house price: the sales price they could afford to pay with the maximum loan amount plus the corresponding minimum down- payment. For example, a $180,000 loan with a 90% LTV and a 10% downpayment would make it possible to buy a $200,000 house: $180,000 + .90 = $200,000. a) Loan A: fixed rate, 80% LTV; no discount points will be paid. Maximum loan amount: $397,968 b) Loan B: ARM, 90% LTV; no discount points will be paid. Maxi- mum loan amount: $410,284 c) Loan C: fixed rate, 95% LTV; three discount points will be paid. Maximum loan amount: $376,465 $400,000. Could they qualify for an 80% fixed-rate loan to make that purchase? (You'll be able to answer this question just by calcu- lating the downpayment and 3% of the sales price for an estimate of closing costs. Calculations involving the monthly payment amount or the loan fees won't be necessary) 5. Now calculate how much cash would be needed at closing for each of the transactions in Question 4. Add together the downpayment, origi- nation fee, and any discount points. Use 3% of the sales price as an estimate of the rest of the closing costs; add that to the other amounts. Also add two months of mortgage payments (PITI) as reserves. For cach transaction, do the Cortinas have cnough cash to qualify? a) Loan A, the 80% fixed-rate loan, with no discount points. Origina- tion fee: 1.50% b) Loan B, the 90% ARM, with no discount points. Origination fee: 1.50% c) Loan C, the 95% fixed-rate loan, with three discount points. Origi- nation fee: 2.00% 7. Finally, suppose that the Cortinas have found a house they really want to buy. It's priced at $505,000. The sellers just put the property on the market, so they aren't willing to sell it for less than the listing price or negotiate about points or other financing concessions. If the Cortinas apply for a 90% fixed-rate loan at 5.25% interest with one discount point and a 1.5% origination fee, their PITI payment would be $3,137.21 and they'd need about $83,287 in cash (including two months of reserves). a) What are the Cortinas' income ratios with this PITI payment? b) Is it possible that the Cortinas could qualify for this loan in spite of those income ratios? Explain why or why not. c) Are there any aspects of the Cortinas' financial situation that a lender would regard as compensating factors? Refer back to the information about the Cortinas given at the beginning of the case study. d) On the other hand, are there any risk factors in the Cortinas' situa- tion that might make a lender more reluctant to approve a conven- tional loan with a debt to income ratio over 36%? c) Suppose the lender won't approve this loan for the Cortinas because their debt to income ratio and housing expense to income ratio are so high. What are some steps they could take that would reduce those ratios? 6. The Cortinas would rather not get an ARM; they don't want to be faced with interest rate and payment increases down the road. They also don't like the idea of a 95% fixed-rate loan; they'd rather make a larger investment in the property and spend less on loan costs. And the $397,968 fixed-rate loan with an 80% LTV requires too much cash at closing. So the Cortinas are looking for alternatives to the three loans we've been considering. a) Suppose the Cortinas decide they want to get preapproved for a 90% fixed-rate loan. They'll pay one discount point, so the interest rate will be 0.25% below the ordinary fixed interest rate. How would that loan compare to Loan B in Question 5, the 90% ARM? You can just consider this question in general terms; it's not neces- sary to do specific calculations. b) What if the Cortinas apply for an 80% fixed-rate loan (like Loan A in Question 5) but decide to buy a house that costs much less than $497,4607 For example, suppose they wanted to buy a house for Radar Income Qualifying --Conventional Loans Loan A: Fixed Interest Rate, 80% Loan-to-Value Ratio Stable Monthly Income Recurring Obligations Base salary Wage canner Wage canner 2 Overtime Cornissions Bonuses Other Total Car loans Credit Cards Student loans Other les Child support Alimony Other Total Debt to Income Ratio Housing Expense to Income Ratio X-28 Siable monthly income Maximum ratio (36%) Maximum obligations Recurring obligations Maximum mortgage payment (PIT) under chetto in contato Stable monthly income Maximum ratio (28%) Maximum mortgage payment PITI) under housing expense ratio Maximum Mortgage Payment (PITI) Maximum PITI payment - 1.15 15% for taxes and hazard insurance Maximum principal and interest payment Interest rate Maximum Loan Amount Maxim loan amount Loan-to-value ratio (80%) Sales price Sales Price Income Qualifying --Conventional Loans Loan B: Adjustable Interest Rate, 90% Loan-to-Value Ratio Stable Monthly Income Recurring Obligations Base salary Wage camer1 Wage emner 2 Overtime Commissions Bonuses Other Total Car loans Credit Cards Student loans Other debts Child support Alimony Other Total Debt to Income Ratio Housing Expense to Income Ratio x 28 Stable monthly income Maximum ratio (36%) Maximum obligations Recurring obligations Maximum mortgage payment (PITOunces debt to income ratio Stable monthly income Maxim vatio (28%) Maximum mortgage put (PIT) under housing expense ratio Maximum Mortgage Payment (PITI) Maximum Pill payment 25% for taxes, hazard insurance, and PMI Maximum principul and interest Myment Interest rate Maximum Loan Amount 90 Maximum loan amount Loan-to-value ratio (90%) Sales price Sales Price Income Qualifying Conventional Loans Loan C: Fixed Interest Rate, 95% Loan-to-Value Ratio Stable Monthly Income Recurring Obligations Base salary Wage emner Wagener 2 Overtime Commissions Bonuses Other Total Carloans Credit Cards Student loans Other debts Child support Alimony Other Total Debt to Income Ratio Housing Expense to Income Ratio x 28 Stabile monthly income Maximum ratio 06% Maximum obligations Recurring obligations Maximum mortgage payment (PITO under debt to income ratio Suable monthly income Manfatio (28%) Maximum mortgage payment (PITO under housing expense ratio Maximum Mortgage Payment (PITI Maximus Pin paymel 25% for taxes, hazard insurance, and PMI Maximum principal and interest payment Maximum Loan Amount Maximum loan amount Londovale ratio (95%) Sales price Sales Price Case Study: Conventional Financing Rick and Teresa Cortina are hoping to buy their first home, and they're going to get preapproved for financing (by a lender) before they start house shopping in earnest. To give you some insight into the underwriting process, let's consider how much money the Cortinas might be qualified to borrow and how that translates into a suitable price range for their search. Based on the financial information shown below, answer the questions that follow. There are worksheets at the end of the case study that you can use for the calculations. Current housing expense The Cortinas have lived in the same rental house for five years; for the past two years, their rent has been $3,450 per month. Employment Teresa has been a paralegal at Tarman & Andrews, a law firm, for two and a half years. Rick has been a sales manager at Acme Tire, Inc. for Back to page 3 Page 373 four years. Income Rick earns a monthly salary of $2,400, plus commissions. His com- missions have averaged $2,985 per month for the past two years. Teresa earns $30.50 per hour for a full-time (40-hour) work week. Taxes (monthly figures) Rick's taxes: Federal income taxes: $570 State income taxes: $218 Social Security/Medicare: $306 Teresa's taxes: Federal income taxes: $563 State income taxes: $212 Social Security/Medicare: $327 Credit scores from the three major agencies Rick: 677,685,687 Teresa: 746, 750, 752 Assets Savings account: $87,000 Miscellaneous (cars, jewelry, etc.): $63,000 Liabilities (monthly payments) Car loan: $417 (30 payments remaining) Car loan: $323 (17 payments remaining) Installment contract: $183 (15 payments remaining) Credit cards: $165 (minimum payments) Student loan: $98 (8 payments remaining) Student loan: $155 (12 payments remaining) Interest rates and fees (30-year conventional loans) In the area where the Cortinas live, lenders are typically charging bor- rowers with credit histories like theirs the following rates and fees. Assume that the applicable loan-level price adjustment(s) are reflected in these interest rates, they won't be charged separately. Fixed-rate loans LTV 90% or less: 5.5% interest LTV over 90%: 6.0% interest ARMS LTV 90% or less: 4.5% interest LTV over 90%: currently unavailable in the Cortinas' area Discount points In the current market, if discount points are paid on either a fixed- rate loan or an ARM, cach point reduces the interest rate by one- quarter of one percent (0.25%). housing expense (the PITI payment) they can qualify for if those two standard ratios are applied. Then, to calculate the maximum principal and interest payment, assume that 15% of their total mortgage pay- ment will go toward property taxes and hazard insurance. If mortgage insurance is required, assume that an additional 10% of their total mortgage payment will be used for that. (These percentages provide only a rough approximation for the purposes of this exercise.) Next, just for the sake of comparison, calculate the Cortinas' maxi- mum housing expense by applying a 45% debt to income ratio to their stable monthly income. (Assume that 25% of their total payment will go toward property taxes, hazard insurance, and mortgage insur ance.) Also, calculate what their housing expense to income ratio would be with that payment amount. Briefly describe under what cir- cumstances, if any, the Cortinas might qualify for a monthly housing expense that large. (Consider the difference between income ratios applied in manual underwriting and automated underwriting, and also whether compensating factors would make a difference.) Also describe some circumstances that would make it more likely that the Cortinas' maximum payment would be determined by the 36% and 28% income ratios instead. 1. Use the "lower of two, middle of three" rule to select a credit score for each of the Cortinas. Which of those two scores will be the indicator score (representative score) for their application? 2. What's their stable monthly income? (Round the answer down to the next dollar.) 3. When the Cortinas apply for preapproval, what's the maximum monthly principal and interest payment they could expect to qualify for in each of the following cases? a) They're preapproved for Loan A, a fixed-rate conventional loan with an 80% LTV. b) They're preapproved for Loan B, a conventional ARM with a 90% LTV. c) They're preapproved for Loan C, a fixed-rate conventional loan with a 95% LTV. For each of these loans, first use the 36% debt to income ratio and the 28% housing expense to income ratio to calculate the largest 4. With the maximum principal and interest payment you calculated for Question 3 using the 36% and 28% ratios, the Cortinas could qualify for the maximum loan amounts shown below. For each loan, state the interest rate that would be charged, taking any discount points into account. (Refer back to the rates listed at the beginning of the case study, each point reduces the listed rate by 0.25%.) Then use the loan-to-value ratio to calculate an estimated house price: the sales price they could afford to pay with the maximum loan amount plus the corresponding minimum down- payment. For example, a $180,000 loan with a 90% LTV and a 10% downpayment would make it possible to buy a $200,000 house: $180,000 + .90 = $200,000. a) Loan A: fixed rate, 80% LTV; no discount points will be paid. Maximum loan amount: $397,968 b) Loan B: ARM, 90% LTV; no discount points will be paid. Maxi- mum loan amount: $410,284 c) Loan C: fixed rate, 95% LTV; three discount points will be paid. Maximum loan amount: $376,465 $400,000. Could they qualify for an 80% fixed-rate loan to make that purchase? (You'll be able to answer this question just by calcu- lating the downpayment and 3% of the sales price for an estimate of closing costs. Calculations involving the monthly payment amount or the loan fees won't be necessary) 5. Now calculate how much cash would be needed at closing for each of the transactions in Question 4. Add together the downpayment, origi- nation fee, and any discount points. Use 3% of the sales price as an estimate of the rest of the closing costs; add that to the other amounts. Also add two months of mortgage payments (PITI) as reserves. For cach transaction, do the Cortinas have cnough cash to qualify? a) Loan A, the 80% fixed-rate loan, with no discount points. Origina- tion fee: 1.50% b) Loan B, the 90% ARM, with no discount points. Origination fee: 1.50% c) Loan C, the 95% fixed-rate loan, with three discount points. Origi- nation fee: 2.00% 7. Finally, suppose that the Cortinas have found a house they really want to buy. It's priced at $505,000. The sellers just put the property on the market, so they aren't willing to sell it for less than the listing price or negotiate about points or other financing concessions. If the Cortinas apply for a 90% fixed-rate loan at 5.25% interest with one discount point and a 1.5% origination fee, their PITI payment would be $3,137.21 and they'd need about $83,287 in cash (including two months of reserves). a) What are the Cortinas' income ratios with this PITI payment? b) Is it possible that the Cortinas could qualify for this loan in spite of those income ratios? Explain why or why not. c) Are there any aspects of the Cortinas' financial situation that a lender would regard as compensating factors? Refer back to the information about the Cortinas given at the beginning of the case study. d) On the other hand, are there any risk factors in the Cortinas' situa- tion that might make a lender more reluctant to approve a conven- tional loan with a debt to income ratio over 36%? c) Suppose the lender won't approve this loan for the Cortinas because their debt to income ratio and housing expense to income ratio are so high. What are some steps they could take that would reduce those ratios? 6. The Cortinas would rather not get an ARM; they don't want to be faced with interest rate and payment increases down the road. They also don't like the idea of a 95% fixed-rate loan; they'd rather make a larger investment in the property and spend less on loan costs. And the $397,968 fixed-rate loan with an 80% LTV requires too much cash at closing. So the Cortinas are looking for alternatives to the three loans we've been considering. a) Suppose the Cortinas decide they want to get preapproved for a 90% fixed-rate loan. They'll pay one discount point, so the interest rate will be 0.25% below the ordinary fixed interest rate. How would that loan compare to Loan B in Question 5, the 90% ARM? You can just consider this question in general terms; it's not neces- sary to do specific calculations. b) What if the Cortinas apply for an 80% fixed-rate loan (like Loan A in Question 5) but decide to buy a house that costs much less than $497,4607 For example, suppose they wanted to buy a house for Radar Income Qualifying --Conventional Loans Loan A: Fixed Interest Rate, 80% Loan-to-Value Ratio Stable Monthly Income Recurring Obligations Base salary Wage canner Wage canner 2 Overtime Cornissions Bonuses Other Total Car loans Credit Cards Student loans Other les Child support Alimony Other Total Debt to Income Ratio Housing Expense to Income Ratio X-28 Siable monthly income Maximum ratio (36%) Maximum obligations Recurring obligations Maximum mortgage payment (PIT) under chetto in contato Stable monthly income Maximum ratio (28%) Maximum mortgage payment PITI) under housing expense ratio Maximum Mortgage Payment (PITI) Maximum PITI payment - 1.15 15% for taxes and hazard insurance Maximum principal and interest payment Interest rate Maximum Loan Amount Maxim loan amount Loan-to-value ratio (80%) Sales price Sales Price Income Qualifying --Conventional Loans Loan B: Adjustable Interest Rate, 90% Loan-to-Value Ratio Stable Monthly Income Recurring Obligations Base salary Wage camer1 Wage emner 2 Overtime Commissions Bonuses Other Total Car loans Credit Cards Student loans Other debts Child support Alimony Other Total Debt to Income Ratio Housing Expense to Income Ratio x 28 Stable monthly income Maximum ratio (36%) Maximum obligations Recurring obligations Maximum mortgage payment (PITOunces debt to income ratio Stable monthly income Maxim vatio (28%) Maximum mortgage put (PIT) under housing expense ratio Maximum Mortgage Payment (PITI) Maximum Pill payment 25% for taxes, hazard insurance, and PMI Maximum principul and interest Myment Interest rate Maximum Loan Amount 90 Maximum loan amount Loan-to-value ratio (90%) Sales price Sales Price Income Qualifying Conventional Loans Loan C: Fixed Interest Rate, 95% Loan-to-Value Ratio Stable Monthly Income Recurring Obligations Base salary Wage emner Wagener 2 Overtime Commissions Bonuses Other Total Carloans Credit Cards Student loans Other debts Child support Alimony Other Total Debt to Income Ratio Housing Expense to Income Ratio x 28 Stabile monthly income Maximum ratio 06% Maximum obligations Recurring obligations Maximum mortgage payment (PITO under debt to income ratio Suable monthly income Manfatio (28%) Maximum mortgage payment (PITO under housing expense ratio Maximum Mortgage Payment (PITI Maximus Pin paymel 25% for taxes, hazard insurance, and PMI Maximum principal and interest payment Maximum Loan Amount Maximum loan amount Londovale ratio (95%) Sales price Sales Price