Question

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 number.)

Monthly gross income	$	3,450
Down payment to be made (percent of purchase price)		20		Percent
Other debt (monthly payment)	$	220
Monthly estimate for property taxes and insurance	$	280
30-year loan		7.0		Percent

Affordable monthly mortgage payment

Affordable mortgage amount

Affordable home purchase

Exhibit 9-8 Housing affordability and mortgage qualification amounts Example A Example B $48,000 = 12 $48,000 = 12 Step 1: Determine your monthly gross income (annual income divided by 12). $4,000 Step 2: With a down payment of at least 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 _.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 homeowner's insurance. -380 -300 -300 (a) Affordable monthly mortgage payment $ 840 $1,020 =$ 7.34 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 9-90-and multiply by $1,000. $ 7.34 * $1,000 Ⓡ$ 1,000 (b) Affordable mortgage amount $114,441 $138,965 =.9 .9 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). (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 exceeding 720, the ratios might increase to 40/45 or 45/50 percent in the above exhibit.

Answer 1

Compute the affordable monthly payment, using the equation as shown below:

Affordable monthly payments = (Monthly gross income*38%) – Other debts payments – Property taxes and insurance

                                                   = ($3,450*38%) - $220 - $280

                                                   = $811

Hence, the affordable monthly payment is $811.

Note:

If any person having other debt payments, lenders use 38% of monthly gross income for principal, interest, taxes, and insurance.

Compute the affordable mortgage amount, using the equation as shown below:

Affordable mortgage = Affordable payment*$1,000/ Monthly mortgage factor

                                   = $811*$1,000/ 6.65

                                   = $121,955

Hence, the affordable mortgage amount is $121,955.

Note:

The monthly mortgage factor of a 30-year mortgage at 7% is 6.65.

Compute the affordable home purchase price, using the equation as shown below:

Home price = Affordable mortgage amount/ (1 – Down payment percentage)

                    = $121,955/ (1 – 0.20)

                    = $152,444

Hence, the affordable home purchase price is $152,444.