Question

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?

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.

You are shopping for a house and wonder what you can afford.
Banks look at collateral, creditworthiness and capacity (ability to
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each month?
Show how you calculated how much you can afford to spend on a
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