Asked by Pman 0% GG
Rollin and Sandra want to buy a home priced at $265,000. They plan to finance this amount less the down payment required. Rollin and Sandra have a combined annual income of $83,600 and have saved $53,000. They have a recurring debt of $582. Use a 20% down payment and the 28/36 ratio to determine if Rollin and Sandra are eligible for a loan. What would you advise them to do if they are not eligible?
All Answers 1
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Step 1 — monthly income and ratio limits
- Gross annual income = $83,600 → monthly gross = $83,600 / 12 = $6,966.67.
- 28% front‑end limit = 0.28 × $6,966.67 = $1,950.67 per month (maximum PITI).
- 36% back‑end limit = 0.36 × $6,966.67 = $2,508.00 per month.
Subtract recurring debt $582 → available for housing under back‑end = $2,508.00 − $582 = $1,926.00.
So the effective maximum monthly housing payment they can have under the 28/36 rule is the smaller of the two: $1,926.00/month.
Step 2 — loan size with 20% down
- 20% down on $265,000 = $53,000. They have $53,000 saved, so mortgage = $265,000 − $53,000 = $212,000.
Step 3 — estimate monthly housing cost (example 30‑yr, 6%)
(If you have a specific rate/term use that instead — I’ll use a common example for illustration.)
- Principal & interest on $212,000, 30 years, 6.0% ≈ $1,271/month.
- Estimate property tax (~1.25% of price) ≈ $3,312.50/year → $276/month.
- Estimate homeowners insurance ≈ $1,000/year → $83/month.
- Estimated PITI ≈ $1,271 + $276 + $83 = $1,630/month.
Conclusion
- Estimated PITI ($1,630) is below the allowable maximum ($1,926), so under the 28/36 rule they would be eligible for this mortgage (given the assumed interest rate and typical tax/insurance estimates).
- Important caveats: lenders will use the actual interest rate you qualify for, exact property taxes, insurance, HOA fees (if any), and they often also require cash reserves and closing costs to be covered. Using all $53,000 for the 20% down payment would leave them with little or nothing for closing costs (commonly 2–5% of purchase price) or an emergency reserve.
If they are short (or to be prudent), I advise:
- Get firm loan quotes (rate, monthly PITI) from lenders and a good estimate of closing costs before committing.
- Don’t spend all savings on down payment — keep an emergency fund/reserves (lenders may require 1–6 months’ mortgage reserves).
- Options if short on closing costs or reserves:
- Ask the seller for a closing cost concession.
- Shop lenders for a lender credit (higher rate in exchange for paying closing costs).
- Consider a slightly lower‑priced home.
- Use gift funds from family (if allowed) for closing costs.
- Delay purchase to save a bit more so you aren’t cash‑strapped after closing.
If you want, I can:
- Recalculate using the exact mortgage rate and term you expect to get,
- Estimate closing costs for your area,
- Or show how smaller/bigger down payments or different prices change eligibility.
- Gross annual income = $83,600 → monthly gross = $83,600 / 12 = $6,966.67.
- 28% front‑end limit = 0.28 × $6,966.67 = $1,950.67 per month (maximum PITI).
- 36% back‑end limit = 0.36 × $6,966.67 = $2,508.00 per month.
Subtract recurring debt $582 → available for housing under back‑end = $2,508.00 − $582 = $1,926.00.
So the effective maximum monthly housing payment they can have under the 28/36 rule is the smaller of the two: $1,926.00/month.
Step 2 — loan size with 20% down
- 20% down on $265,000 = $53,000. They have $53,000 saved, so mortgage = $265,000 − $53,000 = $212,000.
Step 3 — estimate monthly housing cost (example 30‑yr, 6%)
(If you have a specific rate/term use that instead — I’ll use a common example for illustration.)
- Principal & interest on $212,000, 30 years, 6.0% ≈ $1,271/month.
- Estimate property tax (~1.25% of price) ≈ $3,312.50/year → $276/month.
- Estimate homeowners insurance ≈ $1,000/year → $83/month.
- Estimated PITI ≈ $1,271 + $276 + $83 = $1,630/month.
Conclusion
- Estimated PITI ($1,630) is below the allowable maximum ($1,926), so under the 28/36 rule they would be eligible for this mortgage (given the assumed interest rate and typical tax/insurance estimates).
- Important caveats: lenders will use the actual interest rate you qualify for, exact property taxes, insurance, HOA fees (if any), and they often also require cash reserves and closing costs to be covered. Using all $53,000 for the 20% down payment would leave them with little or nothing for closing costs (commonly 2–5% of purchase price) or an emergency reserve.
If they are short (or to be prudent), I advise:
- Get firm loan quotes (rate, monthly PITI) from lenders and a good estimate of closing costs before committing.
- Don’t spend all savings on down payment — keep an emergency fund/reserves (lenders may require 1–6 months’ mortgage reserves).
- Options if short on closing costs or reserves:
- Ask the seller for a closing cost concession.
- Shop lenders for a lender credit (higher rate in exchange for paying closing costs).
- Consider a slightly lower‑priced home.
- Use gift funds from family (if allowed) for closing costs.
- Delay purchase to save a bit more so you aren’t cash‑strapped after closing.
If you want, I can:
- Recalculate using the exact mortgage rate and term you expect to get,
- Estimate closing costs for your area,
- Or show how smaller/bigger down payments or different prices change eligibility.
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