WS 5.1 _Ch 5_FIN 333HYB

Lana and Zack Worzala were married a year ago, and they are thinking about buying a home. They have saved $10,000 to put toward the down payment, but they are wondering if they should pay off some of their consumer debt instead. Their combined gross monthly income is $5,000, and their after-tax monthly income is $4,000. They have the following debts:

	Balance Owed	APR	Monthly Minimum Payment	Number of Payments Left
Zacks car loan	$ 2,000	6%	$340	6
Lanas Visa	1,300	18	35
Zacks MasterCard	4,200	21	110
Lanas student loan	3,370	5	37	114
Zacks student loan	10,600	6	122	114

A) What is the Worzalas debt payment ratio, based on their current situation?

B) Assume mortgage lenders require that the mortgage debt service ratio for a new home purchase not exceed 28 percent of gross monthly income. Given Zack and Lanas gross income, what is the maximum mortgage debt service amount that would be allowed by a lender (including mortgage principal and interest, property taxes, and insurance)?

C) If mortgage lenders require that total debt payments not exceed 36 percent of after-tax disposable income, will Zack and Lana have any trouble meeting this requirement? Explain. (Hint: include the mortgage payment you found in B also).

D) Zack and Lana estimate that, given the prices of homes in the area and the costs of property taxes and insurance, the minimum mortgage debt service they would have to pay is $1,000 per month (including mortgage principal and interest, property taxes, and insurance). If that is the case, will they be able to get a loan with their current debt obligations, assuming that the lenders maximum debt payment ratio is 36 percent? Should they consider applying some of their savings to debt repayment?

(Hint: what if they pay-off car loan? )