Question

Can Abigail and Alexander Afford This Home Using the Installment Debt Loan Criterion? Next week, your friends Abigail and Alexander want to apply to the Third Universal 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, Abigail and Alexander also collected the following information: • Their financial records report a combined gross before tax annual income of $145,000 and current (pre mortgage) installment loan, credit card, and car loan debt of $2,115 per month. • Their property taxes and homeowner's insurance policy are expected to cost $2,150 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%.

Answer 1

All data is rounded off to nearest whole dollar	Amount	High Value	Low Value	Description for Values Obtained
1. Annual Income	145000			Given
2. Monthly income	12083			145000/12
3. Existing Monthly instalment Payment	2115			Given
4. Existing Monthly Instalment Payment as percentage of monthly income	17.5%			(2115/12083)*100
5. Lender's monthly income affordability ratio (A)		38%	33%	Given
6. Maximum Amount of total affordablle installment debt (B)		55100.00	47850.00	145000*A
7. Maxm monthly mortgage payment based on installment ratio (C)		4592	3988	B/12
8. Estimated monthly property tax & insurance payment (D)	179			2150 / 12
9. Maxm monthly loan payment (E)		2298	1694	C - D - 2115
10. Exp interest rate	7.50%			Given
11. Planned loan maturity years	15			Given
12. Mortgage payment factor (F)	92.7012			From the table
13. Maxm loan based on Mortgaged Payment factor (G)		247893	182738	E / F x 10,000
14.Required down payment	29000			145,000 x 20%
15. Maxm purchase price		309866	228423	G / (1 - 20%)

Here all the Blue marked figures are the required answers as per question.