Question

1)You want to buy a house and wonder what you can afford. Banks look at collateral,...

1)You want to buy a house and wonder what you can afford. Banks look at collateral, creditworthiness and capacity (ability to pay) when making loans. Assume you have sufficient down payment and credit score. Your bank has a requirement of 28% housing expense ratio and your gross annual income is $69,000.

Based on those assumptions, how much can you afford to pay in total housing costs each month?

2) You are looking to purchase a new home that is listed at $324,000. You intend to make an offer to buy this house at the full listed price. You have saved enough to make a 20% down payment, so the loan amount will be 80% of the purchase price. You are talking to a lender about a 30-year, fixed rate, amortizing loan. The mortgage constant is 0.05305.  What is the amount of your monthly debt service?

3) Lenders look at PITI, which is Principal, Interest, Taxes, and Insurance. You calculated debt service (Principal and Interest) in the previous question. Now assume that property taxes are $2,400 per year and insurance is $60 per month. Based on these assumptions and the debt service amount you calculated in the previous question, what is your total monthly PITI?

You have now calculated what you can afford to spend on housing in Q1 and what this house will really cost (PITI) in Q3. Based on these calculations, will the bank make you this loan? Why or why not? If not, what is the concern?

Homework Answers

Answer #1

formulas Used:-

gross annual income 69000
total home value 324000
down payment =D3*0.2
Loan Value =D3-D4
Annual Rate 0.05305
tenure (years) 30
monthly debt service =PMT(D6/12,D7*12,-D5)
tax (monthly) 200
Insurance 60
total monthly PITI =D8+D9+D10
monthly housing Exp. Allocation =D2*28%/12

bank will not make a Loan because the Total montly PITI requirement is $1700.01 and according to his income he can only spend $1610 on housing expeces hence due to not having ability to repay bank will not grant the loan.

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