Tim earns $60,000 per year and his wife earns $52,000 per year gross salary. They have a car loan with $325 monthly payment. Their credit card requires a minimum monthly payment of $200 and they have combined student loan payments of $250 per month. The house they want to purchase has been appraised at $405,000, however the purchase price is $425,000. They are applying for a conventional mortgage where the financial institute requires 32% GDS and 40% TDS. If the mortgage interest rate is 3.25% and the amortization is 25 years then what is the maximum amount of loan that they qualify for, based on the GDS?
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Answer: They qualify for $405,000
| Mortgage payment | ||||||
| PV | $405,000 | |||||
| Rate | 3.25% yearly | |||||
| N of periods | 25 years | 300 months | ||||
| Monthly Payment Formula | P= | Rate * (PV) | = | 3.25%/12 * $405,000 | = $1,973.63 | |
| 1 - ( 1 + rate) ^-n | 1 - ( 1 + 3.25%/12 ) ^-300 | |||||
| GDS Ratio = | $1,973.63 | = | 21.15% | |||
| ($60,000 + $52,000) / 12 |
Calculating the GDS we can notice that they are below the requirements at 21.15% vs 32% asked, remember that the GDS does not take into account other loans as Credit card or student car loan, constrasting the TDS where is needed.
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