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Prior to making a mortgage loan, lenders will require a potential borrower to qualify and demonstrate an acceptable credit record and sufficient income to support
Prior to making a mortgage loan, lenders will require a potential borrower to qualify and demonstrate an acceptable credit record and sufficient income to support the loans 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:
Thefrontend or maximum allowable housing expense ratio, which maintains that the applicants totalmonthly expenditures for housing as measured by a years worth of PITI payments cannot exceed of the borrowers annual gross, orbefore tax income.
Thebackend or maximum allowable monthly housing expense and longterm debt ratio, which maintains that the total of allmonthly debt paymentsincluding the PITI mortgage payments, auto loans, and all other debt paymentscannot exceed of applicants 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 $ To prevent their possible embarrassment at the bank, and given your knowledge of personal finance, theyve asked you to help answer the following questions by completing the home affordability worksheet that follows:
What is the minimum and maximum annual housing expense allowable by the bank, given Abigail and Alexanders combined annual income?
What is the minimum and maximum total monthly debt obligation allowable by the bank, given Abigail and Alexanders combined monthly income?
Given their existing debt obligations, what is the maximum additional mortgage obligation that Abigail and Alexander can reasonably expect the bank to consider next week?
To assist in the preparation of the worksheet, Abigail and Alexander have collected the following information:
Their financial records report a combined gross, before tax, annual income of $ and current premortgage installment loan, credit card and car loan, debt of $ per month.
Their best estimate of the interest rate on the new mortgage is and they are interested in obtaining a year loan.
They have accumulated savings of $ that can be used to satisfy the homes down payment and closing costs.
The lender requires a minimum down payment.
Note: When completing the form, round each dollar amount to the nearest whole dollar. Unless labeled differently, all of the values in the worksheet represent dollar amounts. Also, this problem contains additional information that may not be necessary to generate your solutions to the questions.
Home Affordability Worksheet
Based on the Frontend ratio High Value Low Value Amount
Annual income
Lenders frontend income affordability ratio
Maximum allowable annual housing PITI payment
Maximum allowable monthly housing PITI payment
Based on the Backend ratio
Monthly income
Existing monthly installment payments
Existing monthly installment payments as percentage of monthly income
Lenders monthly installment loan affordability ratio
Maximum amount of total monthly affordable installment debt
Maximum monthly mortgage payment PITI given existing debt payments
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