Bob & Betty Homebuyers want to make an offer on this property at the list price.
ID: 2795761 • Letter: B
Question
Bob & Betty Homebuyers want to make an offer on this property at the list price. Bob earns $48,000 per year and Betty earns $54,000 per year. They have very good credit. Their monthly payments are $200 for student loans, $350 for their car payment and minimum credit card payment of $50. They have savings of $125,000. The balance of their student loans is $40,000. Insurance on this house will cost them $900 per year. Property taxes are calculated at 1.25% of the purchase price per year. Monthly mortgage insurance is required if the down payment is less than 20%. In addition to prepaid finance charges, they will have other closing costs of $3,000. You are to evaluate 4 financing scenarios for them. You must determine if they qualify for each of them. They can get loan approval if their housing ratio is less than 32% and their total debt to income ratio is less than 43%. 1. Loan A – Fixed 30 year loan at 3.25% for 80% of the purchase price. Prepaid finance charges will be $1,500 plus 1.60 points on the loan. 2. Loan B - Fixed 30 year loan at 3.625% for 80% of the purchase price. Prepaid finance charges will be $0 plus 0.00 points on the loan. Higher rate, no closing costs. 3. Loan C - Fixed 30 year loan at 3.50% for 90% of the purchase price. Mortgage insurance will cost 0.44% of the loan amount per year. Prepaid finance charges will include the mortgage insurance (included in calculation of APR), plus $1,500 plus 0.25 points on the loan. 4. Loan D - Intermediate adjustable rate mortgage that has a fixed interest rate for the first 5 years at 2.875% for 80% of the purchase price. Prepaid finance charges include 1 point of the loan amount plus $1,500. This loan has an initial interest rate change cap of 5%, subsequent change caps of 2%/year and a life cap of 5%. The lender will use an interest rate of 3.50% to calculate the loan payment to determine their debt to income ratio since there may be payment shock when the rate changes after 5 years. Insurance/Month Total House Payment Loan Payment used to qualify to ARM House Payment used to qualify for ARM Housing Ratio Total Debt to Income Ratio Total Prepaid Finance Charges APR for the Loan Do they qualify for this loan? Down Payment Closing Costs Prepaid Finance Charges
Name Type Your Name Here Loan 80% LTV Lower Rate 475.000 90% LTV, Fixed 30 475.000 80% LTV 5-Year ARM 475.000 80% LTV 475.000 3.625% 3.625% Rate Rate 3.250% 3.500% 3.500% 0.00 Annual MI Rate Points 1.60 0.00 1.00 Other Prepaid Finance | 1,500.00 s 1,500.00500.00 Charges LTV Calculate Month 809 809 90% 809 S 7,825.00 S 7,825.00 S 7,825.00 S 7,825.00 Other Debt Payments Total other monthy Payments 200.00 350.00 50.00 675.00 S 675.00 S 675.00 S 675.00 Student LoansS S 9,500.00 S 9,500.00S4,750.00 S9,500.00 Car Payment S S 38,000.00 S 38,000.00 S 42,750.00 S 38,000.00 Credit Cards $1,285.03 Total Other Down Payment Loan Amount S1,196.14 $1,331.09 S1,445.66 15.68 49.48 Monthly Principal& Interest 600.00 Pavments Monthly Mortgage Insurance Payment Property Taxesmonth InsurancelMonth Total House PaymentExplanation / Answer
Sr Attributes 1 Loan A B C D Explaination 2 Description 3 Offer Price $ 475000 475000 475000 475000 Given in Case Study 4 Rate 3.250% 3.625% 3.500% 2.875% Given in Case Study 5 Qual Rate 3.250% 3.625% 3.500% 3.500% Given in Case Study 6 Annual MI Rate 0.000% 0.000% 0.000% 0.000% Given in Case Study 7 Points 1.60 0.00 0.25 1.00 Given in Case Study 8 Other Prepaid Finance Charges - $ 1500.00 0.00 1500.00 1500.00 Given in Case Study 9 LTV 80.00% 80.00% 90.00% 80.00% Given in Case Study 10 Calculat Monthly Income - $ 8500.00 8500.00 8500.00 8500.00 Total income of BOB and Betty is 10200 per year, so monthly it will be 8500 (102000 / 12) 11 Total Other Monthly Payment 600.00 600.00 600.00 600.00 Student Loan (200) + Car Payment (350) + Credit Card (50) 12 Down Payment 95000.00 95000.00 47500.00 95000.00 Offer Price * ( 1 - LTV ) 13 Loan Amount 380000.00 380000.00 427500.00 380000.00 Offer Price * LTV 14 Monthly Principal And Interest 1653.78 1732.99 1919.67 1706.37 PMT = ( Interest Rate (Present Value )) / (1-(1+ interest rate)^-n) Intereste Rate should be converted into monthly, so interest rate would be RATE / 12 Present Value is Loan Amount N = Number of payment terms, so as loan is for 30 years, total number of payment is 360 (30 * 12) 15 Monthly Mortgage Insurance Payment 156.75 This is 0.44% of Loan Amount, converted monthly 16 Property Taxes/Month 494.79 494.79 494.79 494.79 This is 1.25 % of Property Value. So monthly amount = (475000 * (0.125 /12)) 17 Insurance/Month 75.00 75.00 75.00 75.00 900 is annual insurance premium, so monthly it would be 900 /12 = 75 18 Total House Payment excluding Prepaid Charges 2823.58 2902.79 3089.46 2876.16 This is sum of Monthly payment, Principal&Interest, Mortgage insurance, property tax, home insurance 19 House Expense Ratio 33.22% 34.15% 36.35% 33.84% House expense ratio is (Total House expense (sr#18) / Total House Income (sr#10) ) 20 Debt to Income Ratio 26.52% 27.45% 29.64% 27.13% Total Debt Payment / Income Total Debt = Student Loan (200) + Car Loan (350) + Credit Card (50) + Mortgage EMI Conclusion House Expense Ratio is greter than 32% in every case , evern we have not included Finacial Charges in expense, than too ratio is no favorable for Loan Though Debt to income ratio is much better, Loan can NOT be APPROVED because of unfavorable House Expense Ratio.