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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

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, 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, Abigail and Alexander also collected the following information:

Their financial records report a combined gross before-tax annual income of $145,000 and current (pre-mortgage) installment loan, credit card, and car loan debt of $2,115 per month.
Their property taxes and homeowners 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 homes down payment and closing costs.
The lender requires a minimum 20% down payment, and installment loan affordability ratios that range from a minimum of 33% to a maximum of 38%.

A table of monthly payments (necessary to repay a $10,000 loan) follows.

Loan Maturity

Interest Rate (%) 10 Year 15 Year 20 Year 25 Year 30 Year
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. Remember to round each dollar amount to the nearest whole dollar.

Home Affordability Worksheet

Based on Installment Payments and Monthly Income High Value Low Value Amount
1. Annual income

2. Monthly income

3. Existing monthly installment payments

4. Existing monthly installment payments as percentage of monthly income (%)

%
5. Lenders monthly installment loan affordability ratio 38% 33%
6. Maximum amount of total affordable installment debt

7. Maximum monthly mortgage payment (PITI) affordable based on installment loan ratio

8. Estimated monthly property tax and insurance payment

9. Maximum monthly loan payment (P and I only)

10. Expected interest rate 7.5%
11. Planned loan maturity (years) 15
12. Mortgage payment factor per $10,000 (from the Loan Maturity table)

13. Maximum loan based on mortgage payment factor (from the Loan Maturity table)

14. Required (20%) down payment

15. Maximum home price based on installment loan ratio

Given these results, which statement regarding Abigail and Alexanders mortgage qualification process and their purchase of their $215,000 target home is true?

1. Abigail and Alexander do not qualify to purchase their $215,000 target home according to the Installment Debt Affordability Worksheet criterion.

2. Abigail and Alexander qualify to purchase their $215,000 target home according to the Installment Debt Affordability Worksheet criterion.

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