Question

You are looking to buy a home under the following conditions. The bank will finance up to 95% LTV on a home with a FRM at 5.25% FOR 30 years (monthly payments) and that the maximum payment to income ratio is 28% and total obligations to income is 36%. What price of home should you be looking at and how much down payment will be required? Assume your annual salary is $44,000, property taxes are about $1,800/year, hazard insurance is $600/year, and PMI is $100/month. Additionally, you have a car loan which is $275/month, student loans totaling $125/month, and credit card debt is $100/month.

Answer 1

Let us answer this question in the following manner.

Annual Salary = $ 44,000

Conditions to be met are:

1. Maximum Payment of Loan to Income Ratio = 28% i.e (28/100)*44,000 = $12,320 annually.

2. Total Obligations to Income Ratio = 36% i.e. (36/100)*44,000 = $15,840 annually.

Considering these equations to maintain the house payment to income ratio at 28% his monthly payment towards home loan would be $12,320/12 = $1026.67 monthly.

Now that we know the maximum amount that he could contribute

so we can use the Present value formula to calculate the value of the house which he could purchase.

Formula is : PV = C/(1+r)^n

where C is the cash flow per month, r is rate of interest per month and n is the monthly tenure.

By substituting the values we get the value as $1,85,922. However this is not the actual value of the house, This is the 95% of the value of the house which he would get a loan for. So the actual value of the house which he can purchase would be 1,85,922/.95 which is equal to $1,95,707

Assumption:

Considered the Total Obligation Ration separate from the Maximum Payment Ratio, which means he would be saving ideally 100-28-36 = 36% of his income earned.