A couple wants to buy their first home. They have monthly gross pay of $5,000 pe
ID: 2655953 • Letter: A
Question
A couple wants to buy their first home. They have monthly gross pay of $5,000 per month. They also have a credit card balance of $2,000.00 and they make the minimum 5% monthly payment. They have a car payment of $305.00 per month. They have saved a down payment of $18,000 and they have saved closing costs funds of $8,000 as well. The term of the loan is 30 years and the bank is offering a rate of 4.25% Annual property taxes are approximately $2,400.00 and a homeowners insurance policy is approximately $480.00 annually Considering that the bank's lending guidelines are 28% of gross pay for a housing payment (PTI) and 36% of gross pay for all debt payments, what price should the couple pay for their home?Explanation / Answer
Maximum Housing payment = 28%*Gross pay
= 28%*5000
=$1400
Maximum payment towards loan = 1400- property tax- insurance
= 1400- (2400+480)/12
=$1160
Maximum total debt payment = 36%*Gross pay = 36%*5000 = $1800
Maximum house loan payments as per total debt to Gross income ratio = 1800 - property tax- insurance- Credit card balance-car payment
= 1800- (2400+480)/12- 5%*2000 - 305
=1155
Hence Total loan payment monthly can be a maximum of $1155
PMT= $1155, N= 30*12= 360, Rate= 0.0425/12= 0.003541667
Hence PV of loan using financial calculator = $234,784.78
Total cost of house= Loan + Down payment
$234,784.78 +18000
=$252,784.78
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