You have found your dream home! The purchase price is $275,000 and you have save
ID: 2647083 • Letter: Y
Question
You have found your dream home! The purchase price is $275,000 and you have saved enough to cover your closing costs as well as a 20 percent down payment. The Virginia Credit Union is willing to lend you 80 percent of the purchase price with an interest rate of 4.75 percent amortized over a 30 year period with monthly payments, provided that your totaling housing cost does not exceed 28 percent of your income and your total debt does not exceed 36 percent of your income. Real estate taxes are 1 percent of the purchase price, insurance is $900 per year and homeowners association dues are $200 per month. Your annual earned income is $68,000 and you have income from other sources (investments, stocks, bonds, CDs, etc.) of $4,500 per year. Your other debt (student loans, car payment, credit cards, etc.) obligate you to pay $800 per month.Do you qualify to purchase the house? Prove your answer (show your work).
Explanation / Answer
Solution:
Yearly Ammortization Payable = Principal * r * (1+r)n / [(1+r)n - 1]
Yearly Ammortization Payable = ($275,000*80%) * 4.75% * (1+4.75%)30 / [(1+4.75%)30 - 1]
Yearly Ammortization Payable = $13,906.08
Annual Income = $68,000 + $4,500 = $72,500
Total housing cost per year = Real estate taxes + Insurance + Homeowners association dues + Yearly ammortization
Total housing cost per year = ($275,000*1%) + $900 + ($200*12) + $13,906.08
= $2,750 + $900 + $2,400 + $13,906.08
Total housing cost per year = $19,956.08
Total housing cost as percentage of income = Total housing cost per year/Annual Income * 100
= $19,956.08/$72,500 * 100 = 27.53%
Total housing cost as percentage of income = 27.53%
Total annual debt payment = Other debt + Yearly ammortization payable
Total annual debt payment = ($800*12) + $13,906.08
= $9,600 + $13,906.08
Total annual debt payment = $23,506.08
Total annual debt payment as percentage of income = Total annual debt payment/Annual Income * 100
= $23,506.08/$72,500 * 100 = 32.42%
Total annual debt payment as percentage of income = 32.42%
Total housing cost as percentage of income is 27.53%, which is lower than 28%. Total annual debt payments is 32.42% < 36% of annual income. Thus, you qualify to purchase the house.
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