Question

Exhibit 9-8 Housing affordability and mortgage qualification amounts Example A Example B Step 1: Determine your monthly gross income (annual income divided by 12). $48,000 = 12 $48,000 = 12 $ $ Step 2: With a down payment of at least 3.5 percent, lenders use 33 percent of monthly gross income as a guideline for PITI (principal, interest, taxes, and insurance) and 38 percent of monthly gross income as a guideline for PITI plus other debt payments. 4,000 X.38 1,520 4,000 X.33 1,320 $ $ Step 3: Subtract other debt payments (e.g., payments on an auto loan) and an estimate of the monthly costs of property taxes and homeown- er's insurance. -380 -300 - 300 (a) Affordable monthly mortgage payment $ 840 $1,020 Step 4: Divide this amount by the monthly mortgage payment per $1,000 based on current mortgage rates-an 8 percent, 30-year loan, for example (see Exhibit 9-9)—and multiply by $1,000. - $ 7.34 X $1,000 - $ 7.34 x $1,000 $114,441 $138,965 (b) Affordable mortgage amount Step 5: Divide your affordable mortgage amount by 1 minus the fractional portion of your down payment (e.g., 1-.1 with a 10 percent down payment). -.9 -.9 (c) Affordable home purchase price $127,157 $154,405 Note: The two ratios lending institutions use (step 2) and other loan requirements may vary based on a variety of factors, including the type of mortgage, the amount of the down payment, your income level, and current interest rates. For example, with a down payment of 10 percent or more and a credit score of at least 680, the ratios might increase to 40/45 or 45/50 percent in the above exhibit.

Estimate the affordable monthly mortgage payment, the affordable mortgage amount, and the affordable home purchase price for the following situation. (Refer to Exhibit 9-8 and Exhibit 9-9) (Round time value factor to 2 decimal places, intermediate and final answers to the nearest whole dollar.)

   

Monthly gross income	$	4,700
Down payment to be made (percent of purchase price)		20	percent
Other debt (monthly payment)	$	260
Monthly estimate for property taxes and insurance	$	490
30-year loan		8.5	percent

Affordable monthly mortgage payment	$
Affordable mortgage amount	$
Affordable home purchase	$

Answer 1

Affiordable monthly mortgage payment= $1,036

Affordable mortgage amount= $134,720

Affordable home purchase= $168,400

Detailed working as follows:

33% 38% 1 Given, 2 Guideline for PITI as % of monthly income 3 Guideline for PITI plus other debt payments 4 Monthly gross income $4,700 5 Down payment required 20% 6 Other debts-monthly payment $260 7 Monthly property taxes and insurance $490 8 Tenure of mortgage (Years) $30 9 Interest rate on 30 year mortgage 8.50% 10 Mortgage payment factor per $1,000 of loan (30 years, 8.5%) 7.69 11 Cell reference Values 12 Maximum monthly payments as per guideline fot PITI C4*C2 $1,551 13 Less Monthly Insurance & Tax $490 14 Net mortgage payment as per guideline for PITI C12-C13 $1,061 15 Maximum monthly payments as per guideline for PITI plus other debt C4*C3 $1,786 16 Less Insurance & Tax plus other debts monthly payment C7+C6 $750 17 Net mortgage payment as per guideline for PITI plus other debts C15-C16 $1,036 18 Affordable monthly mortgage payment MIN(C14,C17) $1,036 19 20 Affordable mortgage amount (C18/C20)*1000 $134,720 21 22 Affordable home purchase C20/(1-C5) $168,400