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Can Josh and Mia Afford This Home Using the Monthly Income Loan Criterion? Next week, your friends Josh and Mia want to apply to the Fourth Global Bank for a mortgage loan. They are considering the purchase of a home that is expected to cost $155,000. Given your knowledge of personal finance, they've 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, Josh and Mia also collected the following information: Their financial records report a combined gross before-tax annual income of $125,000 and current (premortgage) installment loan, credit card, and car loan debt of $1,823 per month. Their property taxes and homeowner's insurance policy are expected to cost $3,100 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 $38,500 that can be used to satisfy the home's down payment and closing costs. The lender requires a minimum 20% down payment, and an affordability ratio that ranges from a minimum of 25% to a maximum of 30%. A table of monthly payments necessary to repay a $10,000 loan) follows: Interest Rate (%) 5.0 5.5 6.0 6.5 7.0 7.5 8.0 8.5 9.0 9.5 10.0 Loan Maturity 10 Years 15 Years 20 Years 106.0655 7 9.0794 65.9956 108.5263 81.7083 6 8.7887 111.0205 84.3857 71.6431 113.5480 87.1107 74.5573 116.1085 89.8828 77.5299 118.7018 92.7012 80.5593 121.3276 95.5652 8 3.6440 123.9857 98.4740 86.7823 126.6758 101.4267 89.9726 129.3976 104.4225 9 3.2131 132.1507107.4605 9 6.5022 25 Years 58.4590 61.4087 64.4301 67.5207 70.6779 73.8991 77.1816 8 0.5227 83.9196 87.3697 90.8701 30 Years 53.6822 56.7789 59.9551 6 3.2068 66.5302 69.9215 73.3765 76.8913 80.4623 84.0854 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. Home Affordability Worksheet High Value Based on Monthly Income Low Value Amount 1. Annual income 30% 25% 2. Monthly income 3. Lender's monthly income affordability ratio 4. Maximum monthly mortgage payment (PITI) 5. Estimated monthly property tax and insurance payment 6. Maximum monthly loan payment (P and I only) 7. Expected interest rate 7.5% 15 8. Planned loan maturity (years) 9. Mortgage payment factor per $10,000 (from the Loan Maturity table) 10. Maximum loan based on monthly income 11. Funds Available for a Down Payment and Closing Costs 12. Required (20%) Down Payment 13. Maximum Purchase Price Based on Monthly Income Given these results, which statement regarding Josh and Mia's mortgage qualification process and their purchase of their $155,000 target home is true? Josh and Mia do not qualify to purchase their $155,000 target home according to the Monthly Income Affordability Worksheet criterion. Josh and Mia qualify to purchase their $155,000 target home according to the Monthly Income Affordability Worksheet criterion
