Question

Luis wants to buy a home priced at $315,000. He plans to finance this amount less the down payment required. His mortgage payment would then be $2100. Luis has an annual income of $91,500 and $65,000 in savings. Luis has a car payment of $370, a student loan payment of $165 and a credit card payment of $45. Use a 20% down payment and the 28/36 ratio to determine if Luis is eligible for a loan. What would you advise him to do if he is not eligible?
a.
Luis is eligible for a home loan; he meets all of the requirements.
b.
Luis is not eligible for a home loan; he should continue to save for a down payment.
c.
Luis is not eligible for a loan; he should look for a cheaper house.
d.
Luis is not eligible for a loan; he should reduce his recurring debt.

Answer 1

Answer: a. Luis is eligible for a home loan; he meets all of the requirements.

Workings:
- Price = $315,000; 20% down = $63,000 → loan = $252,000.
- Gross monthly income = $91,500 / 12 = $7,625.
- Front-end (housing) ratio = 2,100 / 7,625 = 27.5% ≤ 28% → OK.
- Other monthly debts = 370 + 165 + 45 = 580.
- Back-end ratio = (2,100 + 580) / 7,625 = 2,680 / 7,625 = 35.2% ≤ 36% → OK.

Note: After the 20% down payment he would have about $2,000 left in savings; lenders sometimes look for reserves, so he should be aware of that, but by the 28/36 test he qualifies.