Question

You looking to buy your first house. The cost of the house is $350,000. The bank has agreed to make a loan to you for 30 years at 3.25% if you can make a down payment of 10%, and the loan payments equal 40% of your gross monthly income.

Based upon this information:

A. What will be the amount of your monthly payments?

B. How much is your gross monthly income?

C. What must your annual salary be in order to be approved for this loan?

Answer 1

Cost of house = $350,000
Down payment = 10%
Therefore, Down payment = 350,000 * 10% = $35,000
Therefore, loan = 350,000 - 35,000 = $315,000

A) Monthly payments:

To find monthly payment we can use the present value of annuity formula:

Where,
PVA = Present Value of Annuity
A = Annuity or Payment
i = rate of interest
n = number of years
a = number of payments per year
na = total number of payments

Substituting the values, we get:

Therefore, the monthly payment = $1,370.90

B) Gross monthly income.

The question says that monthly loan payment is equal to 40% of monthly income. That is $1,370.90 is 40% of your monthly gross income.

To find the gross monthly income, just divide $1,370.90 by 40%.

Gross Monthly Income = $1,370.90 / 40%
=$3,427.25

C) Just multiply your gross monthly income with 12 to get annual salary.

That is:

Annual Salary = $3,427.25 * 12 =  $41,127.00