Question

Your client is buying a house. They have $40,000 available for a down payment. Bank says they will finance at an 80% loan to value. The bank will loan at 4% for 30 yrs based on credit score. What is their payment? How much income do they need to qualify if the bank hurdle rate is 30% of a monthly gross?

Answer 1

Down Payment = $40,000

Value of House = Down Payment / (1-LTV%)

Value of House = 40,000/(20%)

Value of House = $200,000

Loan Amount = House Value * LTV %

Loan Amount = 200,000*80%

Loan Amount = $160,000

Calculating Loan Payments using PMT Function on Financial Calculator:

1. Insert 160,000 and press PV (Present Value of loan amount)

2. Insert 30*12 = 360 and press N (Time Period) (we multiply by 12 since we need to calculate monthly payments)

3. Insert 4%/12 = 0.33% and press I/Y (Interest on Loan) (we divide by 12 since we need to calculate monthly payments)

4. Insert 0 and press FV ( No value of loan at end of 30 years)

5. Press CPT on financial calculator and press PMT

Payment = 763.86

Monthly loan payments are $763.86

Monthly Gross Income Required = Monthly Loan Payments / Hurdle Rate

Monthly Gross Income Required = 763.86 / 30% = $2546.21