Question

Qualifying for a loan You are a potential homebuyer who saw I house you really like. In order to determine if you can buy you decide to get a lender to review your financials. The lender asks for your financial information for housing expenses and other expenses. You tell them the following Annual income is $ 60,000 The home you are looking to buy is priced at $323,000, for which you will need to put down 20% of the purchase price as a down payment. The current 30 year loan, has an interest rate of 4% and which equates to a monthly payment of $1,233.64/mo on an 80% loan to value. The property tax estimate is $325/mo Property insurance is $90/mo HOA fee is $40/mo Other monthly expenses are: Credit cards: $100/mo Car pmt: $250/mo Student loan: $200/mo The lender tells you his total expense ratio to qualify is 43%, while his housing expense ratio is 37%. Do you qualify for this house? Show work How much do you qualify for? ( work it backwards) SHOW YOUR WORK

Answer 1

Answer (a)

Monthly Income = 60000 / 12 = $5,000

Monthly Housing expenses = Monthly mortgage (principal and interest) payments + property taxes + Property insurance + HOA fees

=1233.64 + 325 + 90 + 40

= $1688.64

Projected housing expense ratio = 1688.64 / 5000 =33.77%

Projected housing expense ratio < Required housing expense ratio

Hence projected housing expense ratio meets requirement.

Projected total expense ratio = (1688.64 + 100 + 250 + 200) /5000 = 44.77%

Projected total expense ratio > Required total expense ratio

Hence:

You do not qualify for this house.

Answer (b)

Required total expense ratio to qualify = 43%

Projected total expense should be = 5000 * 43% = $2150

Maximum possible monthly mortgage payment = 2150 - (325 + 90 + 40 + 100 + 250 + 200) = $1145

Maximum possible loan amount = PV (rate, nper, pmt, fv, type) = PV (4%/12, 360, -1145, 0,0) = $239833.12

Maximum house price = 239833.12 / 80% = $299791.40

You qualify for:

Loan amount = $239,833.12

House priced at = $299,791.40