12. Can I afford this home? - Part 2 Aa Aa Can Cheyenne and Michael Afford This
ID: 1171915 • Letter: 1
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12. Can I afford this home? - Part 2 Aa Aa Can Cheyenne and Michael Afford This Home Using the Installment Debt Loan Criterion? Next week, your friends Cheyenne and Michael want to apply to the Tenth National 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, 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, Cheyenne and Michael also collected the following information: • Their financial records report a combined gross before-tax annual income of $125,000 and current (pre-mortgage) 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 $4,300 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 home's 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. Interest Rate (%) 5.0 5.5 6.0 6.5 7.0 7.5 8.0 10 Years 106.0655 108.5263 111.0205 113.5480 116.1085 118.7018 121.3276 Loan Maturity 15 Years 20 Years 79.0794 6 5.9956 81.7083 68.7887 84.3857 71.6431 87.1107 74.5573 89.8828 77.5299 92.7012 80.5593 95.5652 83.6440 25 Years 30 Years 58.4590 53.6822 61.4087 56.7789 64.4301 59.9551 67.5207 63.2068 70.6779 66.5302 7 3.8991 69.9215 77.1816 73.3765 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. Low Value Amount 125,000 10,417 1,823 17.50% Home Affordability Worksheet Based on Installment Payments and Monthly Income High Value 1. Annual income 2. Monthly income 3. Existing monthly installment payments 4. Existing monthly installment payments as percentage of monthly income (%) 5. Lender's monthly installment loan affordability ratio 6. Maximum amount of total affordable installment debt 7. Maximum monthly mortgage payment (PITI) affordable based on installment loan ratio 8. Estimated monthly property tax and insurance payment 9. Maximum monthly loan payment (P and I only) 10. Expected interest rate 11. Planned loan maturity (years) 12. Mortgage payment factor per $10,000 (from the Loan Maturity table) 13. Maximum loan based on mortgage payment factor (from the Loan Maturity table) 14. Required (20%) down payment 15. Maximum home price based on installment loan ratio Maximum home price based on instaliment loan ratio- Given these results, which statement regarding Cheyenne and Michael's mortgage qualification process and their Durchase of their $215,000 target home is true? O Cheyenne and Michael do not quality to purchase their $215,000 target home according to the installment Debt Affordability Worksheet criterion. O Cheyenne and Michael qualify to purchase their $215,000 target home according to the Installment Debt Affordability Worksheet criterion.Explanation / Answer
A 1 Annual Income $125,000 B=A/12 2 Monthly income $10,417 C 3 Existing monthly instalment payment $1,823 D=(C/B)*100 4 Existing monthly instalment payment as percentage of monthly income 17.5% E 5 Lenders monthly instalment loan affordability ratio 38% 33% F 6 Maximum amount of total affordable instalment debt G 7 Maximum monthly mortgage payment (PITI)affordable based on instalment loan ratio $ 2,135 $ 1,615 (0.38-0.175)*10417 and (0.33-0.175)*10417) H=4300/12 8 Estimated monthly property tax and insurance payment $358 I=G-H 9 Maximum monthly loan repayment(Pand I only) $ 1,777 $ 1,257 J 10 Expected interest rate 7.50% K 11 Planned loan maturity (Years) 15 L 12 Mortgage payment factor per $10000 92.7012 M=10000*(I/L) 13 Mortgage loan based on mortage payment factor $ 191,743 $ 135,558 N=P*0.2 14 Required (20%) down payment $ 47,936 P=19173/(1-0.2) 15 Maximum home price based on instalment loan ratio $ 239,679 Cost of home $ 215,000 Down payment $50,000 Loan Required $ 165,000 Cheyenne and Michael qualify to purchase their $215,000 home as per instalment debt affordabilty worksheet criterion
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