Question

PLEASE ANSWER A!!!

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.

  

Name:	Type Your Name Here
Loan	A	B	C	D
Description	80% LTV Lower Rate	80% LTV	90% LTV Fixed 30	80% LTV 5-Year ARM
		Higher Rate
Offer Price	$475,000	$475,000	$475,000	$475,000
Rate	3.250%	3.625%	3.500%	2.875%
Qual Rate	3.250%	3.625%	3.500%	3.500%
Annual MI Rate	0%	0%	0%	0.00%
Points	1.60	0.00	0.25	1.00
Other Prepaid Finance Charges	$1,500.00	$-	$1,500.00	$1,500.00
LTV	80%	80%	90%	80%
Calculate Monthy Income					Other Debt Payments
Total other monthy Payments					Student Loans
Down Payment					Car Payment
Loan Amount					Credit Cards
Monthly Principal & Interest					Total Other Payments
Monthly Mortgage Insurance Payment
Property Taxes/month
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
Total Cash to Close on the House
Analysis of Your Calculations
Calculate the difference in the cash required to close and the total monthly payment for the 30 year loan with the higher rate and the 90% loan with mortgage insurance.
Additional Cash to Close [Loan B Less Loan C]	Additional Monthly Pmt [Loan B Less Loan C]
Should these buyers take the 90% loan and use the reduced cash to close to pay off their student loans? Explain you recommendation.
	#NUM!
Rate on Difference of payment compared to down payment for loans B and C.
Calculate the rate of return on the difference of Cash to Close here:
Use this space to explain why they should or should NOT put down 10%
Consider the ARM loan.
What is the balance after 5 years?
What is the maximum possible principal and interest payment on that loan in year 6, when the rate adjusts?
Which Loan option would you recommend? Loan
Why do you suggest this option?

Answer 1

As requested, I am answering for the Loan option A.

Monthly Income: They have annual income 54000 and 48000 which comes to a total of 102,000 dollars. Thus, monthly income = 102000/12 = $8500

Total Other Monthly Payments are given in the question: student loans + car payments + credit card payment = 200 + 350 + 50 = $600

Down Payment: Their Loan to Value ratio is 80%. So they need to pay 20% as down payment. List price is 475,000. Down payment = 0.2*475,000 = $95000

Loan Amount = 80% of the list price = $380,000

Monthly Payments ( principal + interest ) can be calculated using the payment formula.

We have PV = 380,000 , FV =0, time period (n) = 30*12 = 360 and rate = (3.25/12)%

We get payment = $1,653.78

Monthly Mortgage Insurance Payment is 0 here as down payment = 20% of the loan

Property Taxes = 1.25% of the purchase price = 0.0125*475000 = $5937.5

This is the annual amount. Monthly property taxes = 5937.5/12 = $494.79

Insurance is $900 per year which comes to 900/12 = $75 per month

Total House Payment per month will be the sum of all these amounts. We get

Total monthly house payment = 1653.8 + 494.79 + 75 = $2,223.58

Loan Payment and House Payment for ARM is not applicable for Loan A as it is a fixed rate loan.

Housing ratio can be calculated as the ration of Total monthly house payment to theor total monthly gross income.

Housing ratio = 2223.58/8500 = 0.26 = 26%

For Debt to income ratio, we’ll add other monthly payments to the house payment and divide it with gross monthly income

Debt to income ratio =( 2223.8 + 600 )/ 8500 = 0.33 = 33%

Prepaid Finance charges = 1500 + 1.6 points on the loan

= 1500 + 0.016*380000 = $7580

APR ( Annual Percentage rate ) has bee already given = 3.25%

Down Payment: Calculated above = $95000

As both housing ration and debt to income ratio are below the threshold set, they qualify for the loan.

Closing Costs, as provided = $3000.

Prepaid Finance Charges as calculated above = $7580

Total Cash to Close on the House = Prepaid Finance Charges + down payment + Closing Costs

= 7580 + 95000 + 3000 = $105,580