5 Credit Scoring (20 pts.) Note: LTV = Loan-to-Value Loan Request Amount/Value o
ID: 2600917 • Letter: 5
Question
5 Credit Scoring (20 pts.) Note: LTV = Loan-to-Value Loan Request Amount/Value of Home Standard Mortgage Program: 30-year fixed term, 5% fixed rate, annual payments Following conditions must be met: a) Total Annual Mortgage Payment 28% of Gross Income b) Total annual debt payments (mortgage + other debt payments) c) LTV 0.8 (at least a 20% down payment) 36% of Gross Income First-time Homebuver Mortgage Program: 30-year fixed term, 5% fixed rate, annual payments on first mortgage up to 80% of home value 15-year fixed term, 7% fixed rate, annual payments on second mortgage up to 15% of home value Following conditions must be met: a) Total Annual Mortgage Payments 28% of Total Gross Income b) Total annual debt payments (mortgage + existing debt payments) $ 36% of Total Gross Income c5% minimum down payment Note: For the first-time homebuyer program, the first mortgage is maxed out first at 80% of the value or purchase price of the home. The second mortgage is then used to cover the difference between the remaining 20% of the purchase price and the down payment the buyer is able to make.Explanation / Answer
Solution i:
Value of home = $225,000
Required Loan = $180,000
Loan to Value = $180,000 / $225,000*100 = 80% Therefore condition of LTV met.
Gross income of Tom = $63,000
Annual EMI for loan = Loan Value / cumulative PV factor for 30 years at 5% interest rate
= $180,000 / 15.372 (See PV table) = $11,710
Total annual debt payment = $11,710 + $3,000 +$6,000 = $20,710
Total annual mortgage payment to Gross income = $11,710 / $63000*100 = 18.59%
Total annual debt payment to Gross income = $20710 / $63,000*100 = 32.87%
As annual mortgage payment is lessor than 28% of Gross income and annual debt payment is lesser than 36% of Gross income therefore loan will be approved for TOM and he will be eligible for Loan of $180,000 for a period of 30 years.
Solution ii:
Down payment by Tom under first time home buyer program = $225,000*10% = $22,500
Loan for First mortgage = 80% of home value = 225000*80% = $180,000
Loan for 2nd mortgage = 10% of home value = 225000*10% = $22,500
Annual EMI for loan – First mortgage = Loan Value / cumulative PV factor for 30 years at 5% interest rate
= $180,000 / 15.372 (See PV table) = $11,710
Annual EMI for loan – 2nd mortgage = Loan Value / cumulative PV factor for 15 years at 7% interest rate
= $22,500 / 9.108 (See PV table) = $2,470
Total annual mortgage payment = $11,710 + $2,470 = $14,180
Total annual debt payment = $14,180 + $3,000 + $6,000 = $23,180
Total annual mortgage payment to Gross income = $14,180 / $63000*100 = 22.50%
Total annual debt payment to Gross income = $23,180 / $63,000*100 = 36.79%
As annual mortgage payment is lesser than 28% of Gross income but annual debt payment is greater than 36% of Gross income therefore loan will be rejected for TOM under first time home buyer program.
Solution iii:
Down payment by Tom under first time home buyer program = $225,000*5% = $11,250
Loan for First mortgage = 80% of home value = 225000*80% = $180,000
Loan for 2nd mortgage = 15% of home value = 225000*15% = $33,750
Annual EMI for loan – First mortgage = Loan Value / cumulative PV factor for 30 years at 5% interest rate
= $180,000 / 15.372 (See PV table) = $11,710
Annual EMI for loan – 2nd mortgage = Loan Value / cumulative PV factor for 15 years at 7% interest rate
= $33,750 / 9.108 (See PV table) = $3,706
Total annual mortgage payment = $11,710 + $3,706 = $15,416
Total annual debt payment = $15,416 + $6,000 = $21,416
Total annual mortgage payment to Gross income = $15,416 / $63000*100 = 24.47%
Total annual debt payment to Gross income = $21,416 / $63,000*100 = 34%
As annual mortgage payment is lesser than 28% of Gross income and annual debt payment is lesser than 36% of Gross income therefore loan will be approved for TOM under first time home buyer program and he will be eligible for Loan of $180,000 as a first mortgage for a period of 30 years at 5% interest and loan of $33,750 as 2nd mortgage for a period of 15 years at 7% interest
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