Question
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 | |||
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Based on Installment Payments and Monthly Income | High Value | Low Value | Amount |
1. Annual income |
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2. Monthly income |
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3. Existing monthly installment payments |
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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 |
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| |
7. Maximum monthly mortgage payment (PITI) affordable based on installment loan ratio |
|
| |
8. Estimated monthly property tax and insurance payment |
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9. Maximum monthly loan payment (P and I only) |
|
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10. Expected interest rate | 7.5% | ||
11. Planned loan maturity (years) | 15 | ||
12. Mortgage payment factor per $10,000 (from the Loan Maturity table) |
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13. Maximum loan based on mortgage payment factor (from the Loan Maturity table) |
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14. Required (20%) down payment |
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15. Maximum home price based on installment loan ratio |
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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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