Questions 1-4 are part of the due diligence process. First, we calculate how much the buyer can afford to spend on housing and then we calculate how much a particular home will cost. If the house will cost more than the buyer can afford, the bank will likely deny the loan or ask for a larger down payment, which will reduce the monthly costs.

Question 1: You want to buy a house and wonder what you can afford. Banks look at collateral, creditworthiness, and capacity (ability to pay) when making loans. Assume you have sufficient down payment and credit score. Your bank has a requirement of a 28% housing expense ratio and your gross annual income is $67,000.

Based on those assumptions, how much can you afford to pay in total housing costs each month?

Please show/explain every step in finding a solution

Question 2: You are looking to purchase your dream home that is listed at $312,000. You intend to make an offer to buy this house at the full listed price. You have saved enough to make a 20% down payment, so the loan amount will be 80% of the purchase price. You are talking to a lender about a 30-year, fixed-rate, amortizing loan. Based on the lender's interest rate, the mortgage constant is 0.05305.

Using this information, what is the amount of your monthly debt service?

Please show/explain every step in finding a solution

Question 3: You have already calculated debt service on this loan, but lenders will also look at your estimated property taxes and insurance in order to approve your loan. Lenders call this PITI, which stands for Principal, Interest, Taxes, and Insurance.

You calculated debt service (Principal and Interest) in the previous question. Now assume that property taxes are $2,400 per year and insurance is $50 per month. Based on these assumptions and the debt service amount you calculated in the previous question, what is your total monthly PITI?

Please show/explain every step in finding a solution

Question 4: Now let's pull this all together and see if the bank will approve the loan on your dream home. You calculated what you can afford to spend on housing in Q1 and what this house will really cost (PITI) in Q3.

Based on these calculations, will the bank make you this loan? Why or why not? If not, what is the bank's concern?

Please explain and show the math that led you to this conclusion.