Capital structure Kirsten Neal is interested in purchasing a new house given tha

Question

Capital structure Kirsten Neal is interested in purchasing a new house given that mortgage rates are low. Her bank has specific rules regarding an applicants ability to meet the contractual payments associated with the requested debt. Kirsten must submit personal financial data for her income, expenses, and existing installment loan payments. The bank then calculates and compares certain ratios to predetermined allowable values to determine if it will make the requested loan. The requirements are as follows: (1) Monthly mortgage payments -29%0f monthly gross (before-tax) income. (2) Total monthly installment payments (including the mortgage payments)-38% of monthly gross(before-tax) income. Kirsten submits the following personal financial data: Monthly gross (before-tax) income $4,600 375 Monthly installment loan obligation:s Requested mortgage 145,000 1,170 Monthly mortgage payment a. The ratio for requirement 1 is 96. (Round to two decimal places.) b. The ratio for requirement 2 is96. (Round to two decimal places.) c. Assuming that Kirsten has adequate funds for the down payment and meets other lender requirements, will Kirsten be granted the loan? (Select from the drop-down menu.) Since Kirsten's debt-related expenses as a percentage of her monthly gross income are less than bank-specified maximums, her loan application

Explanation / Answer

a) 1170/4600 = 25.435% which is less than 29%. Therefore, the requirement 1 is met.

b) (375+1170)/4600 = 33.587% which is less than 38%. Therefore, the requirement 2 is also met.

c) Since kristen,s debt-related expenses as a% of her monthly gross income are less than bank specified maximums i.e. 29% and 38%, her loan application will be accepted. (Given that she has adequate funds for down payment and she met other requirements)

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