Can Olivia and Anthony Afford This Home Using the Monthly Income Loan Criterion? Next week, your friends Olivia and Anthony want to apply to the Fourth Global Bank for a mortgage loan. They are considering the purchase of a home that is expected to cost $125,000. Given your knowledge of personal finance, they’ve asked for your help in completing the Home Affordability Worksheet that follows. (Note: When completing the form, round each dollar amount to the nearest whole dollar.) To assist in the preparation of the worksheet, Olivia and Anthony also collected the following information: • Their financial records report a combined gross before-tax annual income of $125,000 and current (premortgage) installment loan, credit card, and car loan debt of $1,823 per month. • Their property taxes and homeowner’s insurance policy are expected to cost $3,125 per year. • Their best estimate of the interest rate on their mortgage is 7.5%, and they are interested in obtaining a 15-year loan. • They have accumulated savings of $32,500 that can be used to satisfy the home’s down payment and closing costs. • The lender requires a minimum 20% down payment, and an affordability ratio that ranges from a minimum of 25% to a maximum of 30%. A table of monthly payments (necessary to repay a $10,000 loan) follows: Loan Maturity Interest Rate (%) 10 Years 15 Years 20 Years 25 Years 30 Years 5.0 106.0655 79.0794 65.9956 58.4590 53.6822 5.5 108.5263 81.7083 68.7887 61.4087 56.7789 6.0 111.0205 84.3857 71.6431 64.4301 59.9551 6.5 113.5480 87.1107 74.5573 67.5207 63.2068 7.0 116.1085 89.8828 77.5299 70.6779 66.5302 7.5 118.7018 92.7012 80.5593 73.8991 69.9215 8.0 121.3276 95.5652 83.6440 77.1816 73.3765 8.5 123.9857 98.4740 86.7823 80.5227 76.8913 9.0 126.6758 101.4267 89.9726 83.9196 80.4623 9.5 129.3976 104.4225 93.2131 87.3697 84.0854 10.0 132.1507 107.4605 96.5022 90.8701 87.7572 (Note: Unless labeled differently, all of the following values represent dollar amounts. Also, some values calculated or used in the upper section of the table may also be used in the lower section.) Home Affordability Worksheet Based on Monthly Income High Value Low Value Amount 1. Annual income 2. Monthly income 3. Lender’s monthly income affordability ratio 30% 25% 4. Maximum monthly mortgage payment (PITI) 5. Estimated monthly property tax and insurance payment 6. Maximum monthly loan payment (P and I only) 7. Expected interest rate 7.5% 8. Planned loan maturity (years) 15 9. Mortgage payment factor per $10,000 (from the Loan Maturity table) 10. Maximum loan based on monthly income 11. Funds Available for a Down Payment and Closing Costs 12. Required (20%) Down Payment 13. Maximum Purchase Price Based on Monthly Income Given these results, which statement regarding Olivia and Anthony’s mortgage qualification process and their purchase of their $125,000 target home is true? Olivia and Anthony qualify to purchase their $125,000 target home according to the Monthly Income Affordability Worksheet criterion. Olivia and Anthony do not qualify to purchase their $125,000 target home according to the Monthly Income Affordability Worksheet criterion.

Can Olivia and Anthony Afford This Home Using the Monthly Income Loan Criterion? Next week, your friends Olivia and Anthony want to apply to the Fourth Global Bank for a mortgage loan. They are considering the purchase of a home that is expected to cost $125,000. Given your knowledge of personal finance, they’ve asked for your help in completing the Home Affordability Worksheet that follows. (Note: When completing the form, round each dollar amount to the nearest whole dollar.) To assist in the preparation of the worksheet, Olivia and Anthony also collected the following information: • Their financial records report a combined gross before-tax annual income of $125,000 and current (premortgage) installment loan, credit card, and car loan debt of $1,823 per month. • Their property taxes and homeowner’s insurance policy are expected to cost $3,125 per year. • Their best estimate of the interest rate on their mortgage is 7.5%, and they are interested in obtaining a 15-year loan. • They have accumulated savings of $32,500 that can be used to satisfy the home’s down payment and closing costs. • The lender requires a minimum 20% down payment, and an affordability ratio that ranges from a minimum of 25% to a maximum of 30%. A table of monthly payments (necessary to repay a $10,000 loan) follows: Loan Maturity Interest Rate (%) 10 Years 15 Years 20 Years 25 Years 30 Years 5.0 106.0655 79.0794 65.9956 58.4590 53.6822 5.5 108.5263 81.7083 68.7887 61.4087 56.7789 6.0 111.0205 84.3857 71.6431 64.4301 59.9551 6.5 113.5480 87.1107 74.5573 67.5207 63.2068 7.0 116.1085 89.8828 77.5299 70.6779 66.5302 7.5 118.7018 92.7012 80.5593 73.8991 69.9215 8.0 121.3276 95.5652 83.6440 77.1816 73.3765 8.5 123.9857 98.4740 86.7823 80.5227 76.8913 9.0 126.6758 101.4267 89.9726 83.9196 80.4623 9.5 129.3976 104.4225 93.2131 87.3697 84.0854 10.0 132.1507 107.4605 96.5022 90.8701 87.7572 (Note: Unless labeled differently, all of the following values represent dollar amounts. Also, some values calculated or used in the upper section of the table may also be used in the lower section.) Home Affordability Worksheet Based on Monthly Income High Value Low Value Amount 1. Annual income 2. Monthly income 3. Lender’s monthly income affordability ratio 30% 25% 4. Maximum monthly mortgage payment (PITI) 5. Estimated monthly property tax and insurance payment 6. Maximum monthly loan payment (P and I only) 7. Expected interest rate 7.5% 8. Planned loan maturity (years) 15 9. Mortgage payment factor per $10,000 (from the Loan Maturity table) 10. Maximum loan based on monthly income 11. Funds Available for a Down Payment and Closing Costs 12. Required (20%) Down Payment 13. Maximum Purchase Price Based on Monthly Income Given these results, which statement regarding Olivia and Anthony’s mortgage qualification process and their purchase of their $125,000 target home is true? Olivia and Anthony qualify to purchase their $125,000 target home according to the Monthly Income Affordability Worksheet criterion. Olivia and Anthony do not qualify to purchase their $125,000 target home according to the Monthly Income Affordability Worksheet criterion.

Personal Finance

13th Edition

ISBN:9781337669214

Author:GARMAN

Publisher:GARMAN

Chapter9: Obtaining Affordable Housing

Section: Chapter Questions

Problem 3FPC

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Question

Can Olivia and Anthony Afford This Home Using the Monthly Income Loan Criterion?

Next week, your friends Olivia and Anthony want to apply to the Fourth Global Bank for a mortgage loan. They are considering the purchase of a home that is expected to cost $125,000. Given your knowledge of personal finance, they’ve asked for your help in completing the Home Affordability Worksheet that follows. (Note: When completing the form, round each dollar amount to the nearest whole dollar.)

To assist in the preparation of the worksheet, Olivia and Anthony also collected the following information:

•	Their financial records report a combined gross before-tax annual income of $125,000 and current (premortgage) installment loan, credit card, and car loan debt of $1,823 per month.
•	Their property taxes and homeowner’s insurance policy are expected to cost $3,125 per year.
•	Their best estimate of the interest rate on their mortgage is 7.5%, and they are interested in obtaining a 15-year loan.
•	They have accumulated savings of $32,500 that can be used to satisfy the home’s down payment and closing costs.
•	The lender requires a minimum 20% down payment, and an affordability ratio that ranges from a minimum of 25% to a maximum of 30%.

A table of monthly payments (necessary to repay a $10,000 loan) follows:

Loan Maturity

Interest Rate (%)	10 Years	15 Years	20 Years	25 Years	30 Years
5.0	106.0655	79.0794	65.9956	58.4590	53.6822
5.5	108.5263	81.7083	68.7887	61.4087	56.7789
6.0	111.0205	84.3857	71.6431	64.4301	59.9551
6.5	113.5480	87.1107	74.5573	67.5207	63.2068
7.0	116.1085	89.8828	77.5299	70.6779	66.5302
7.5	118.7018	92.7012	80.5593	73.8991	69.9215
8.0	121.3276	95.5652	83.6440	77.1816	73.3765
8.5	123.9857	98.4740	86.7823	80.5227	76.8913
9.0	126.6758	101.4267	89.9726	83.9196	80.4623
9.5	129.3976	104.4225	93.2131	87.3697	84.0854
10.0	132.1507	107.4605	96.5022	90.8701	87.7572

(Note: Unless labeled differently, all of the following values represent dollar amounts. Also, some values calculated or used in the upper section of the table may also be used in the lower section.)

Home Affordability Worksheet
Based on Monthly Income	High Value	Low Value	Amount
1. Annual income
2. Monthly income
3. Lender’s monthly income affordability ratio	30%	25%
4. Maximum monthly mortgage payment (PITI)
5. Estimated monthly property tax and insurance payment
6. Maximum monthly loan payment (P and I only)
7. Expected interest rate			7.5%
8. Planned loan maturity (years)			15
9. Mortgage payment factor per $10,000 (from the Loan Maturity table)
10. Maximum loan based on monthly income
11. Funds Available for a Down Payment and Closing Costs
12. Required (20%) Down Payment
13. Maximum Purchase Price Based on Monthly Income

Given these results, which statement regarding Olivia and Anthony’s mortgage qualification process and their purchase of their $125,000 target home is true?

Olivia and Anthony qualify to purchase their $125,000 target home according to the Monthly Income Affordability Worksheet criterion.

Olivia and Anthony do not qualify to purchase their $125,000 target home according to the Monthly Income Affordability Worksheet criterion.

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