Question

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?

Answer 1

Step 1 — basic numbers
- Home price: $265,000
- 20% down payment: 0.20 × 265,000 = $53,000 (they have this saved)
- Loan amount = 265,000 − 53,000 = $212,000
- Gross monthly income = 83,600 / 12 = $6,966.67
- Recurring monthly debt = $582

Step 2 — 28/36 ratio limits
- 28% housing limit = 0.28 × 6,966.67 = $1,950.67 per month (maximum PITI)
- 36% total-debt limit = 0.36 × 6,966.67 = $2,508.00 per month
- Using the 36% limit, available for housing = 2,508.00 − 582 = $1,926.00 per month
- So the controlling housing limit is the smaller of the two = $1,926.00 per month

Step 3 — estimate actual mortgage payment (example: 30‑year fixed)
We need to compare that $1,926 housing limit to a realistic PITI for a $212,000 mortgage. PITI = principal & interest (P&I) + property taxes + homeowners insurance. Assume:
- Property tax ≈ 1.0% of home value → 0.01 × 265,000 = $2,650/yr = $220.83/mo
- Homeowners insurance ≈ $1,200/yr = $100/mo
- Taxes + insurance ≈ $320.83/mo

That leaves for principal & interest: 1,926.00 − 320.83 = $1,605.17/month available for P&I.

P&I examples for a $212,000 loan (30-year = 360 months)
- At 6.0% → P&I ≈ $1,271.70 → PITI ≈ $1,592.50
- At 7.0% → P&I ≈ $1,410.80 → PITI ≈ $1,731.60
- Even at 8.0% → P&I ≈ $1,557.00 → PITI ≈ $1,877.80

All of these are below the $1,926 housing limit and below the 36% total-debt limit when you add the $582 recurring debt.

Conclusion
Under the 28/36 rule (with the assumptions above), Rollin and Sandra are eligible for the loan on a $265,000 house with a $53,000 (20%) down payment. Their expected PITI for a typical 30‑year mortgage comfortably fits the DTI limits.

Practical advice and cautions
- Closing costs and prepaid items typically run ~2–5% of the purchase price ($5,300–$13,250). If they use all $53,000 for the 20% down payment they may have little or nothing left for closing costs and reserves. Lenders generally like to see some post‑closing reserves. Plan for closing costs (save more, negotiate seller concessions, or roll some costs into the loan where feasible).
- Get multiple lender quotes and a preapproval to lock in an exact rate and precise PITI (taxes and insurance vary by location).
- Keep an emergency fund instead of exhausting all savings. If they can’t cover closing costs/reserves, alternatives are: buy a lower‑priced home, pay down the $582 recurring debt to boost qualifying room, get a gift/assistance for closing, or accept a smaller down payment (but that may trigger PMI and higher monthly costs).
- Ensure credit scores and documentation are in good order to get the best rate.

If you want, I can:
- compute the exact maximum interest rate they could afford,
- estimate closing costs for their area,
- or run scenarios (smaller down payment, different tax/insurance assumptions, different loan terms).