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 — compute income and the 28/36 limits
- Gross annual income = $83,600 → gross monthly = $83,600 / 12 = $6,966.67.
- 28% front‑end (max housing PITI) = 0.28 × $6,966.67 = $1,950.67/mo.
- 36% back‑end (total debt) = 0.36 × $6,966.67 = $2,508.00/mo.
- Subtract recurring debt $582 → maximum remaining for mortgage PITI under back‑end rule = $2,508.00 − $582 = $1,926.00/mo.

So the effective maximum monthly PITI they can carry is the smaller of the two limits = $1,926.00.

Step 2 — loan amount and estimated payment
- Purchase price = $265,000. 20% down = $265,000 × 0.20 = $53,000.
- They have $53,000 saved, so planned loan = $265,000 − $53,000 = $212,000.
- Assume a 30‑year fixed mortgage (360 months). The exact monthly principal & interest (P&I) depends on the interest rate. Examples:
- At 6.0% → P&I ≈ $1,272/mo.
- At 7.0% → P&I ≈ $1,412/mo.
- At 8.0% → P&I ≈ $1,556/mo.
(These are standard amortization calculations for a $212,000 loan.)

Step 3 — include taxes & insurance (PITI)
You must include property tax and homeowners insurance in the housing payment. A reasonable estimate:
- Property tax (≈1.2% of price) ≈ $3,180/yr ≈ $265/mo.
- Homeowner’s insurance ≈ $900–1,200/yr ≈ $75–100/mo.
Combine ≈ $340/mo (estimate). Now add to P&I:

- At 6%: total PITI ≈ $1,272 + $340 = $1,612/mo.
- At 7%: PITI ≈ $1,412 + $340 = $1,752/mo.
- At 8%: PITI ≈ $1,556 + $340 = $1,896/mo.

Compare to the maximum allowed PITI $1,926: in each of the above rate examples, estimated PITI is below $1,926. Therefore, under the 28/36 rule, Rollin and Sandra would be considered eligible for the loan in typical rate scenarios.

Other practical considerations / advice
- Closing costs and reserves: they plan to use all $53,000 for the 20% down payment. They also need closing costs (commonly 2–5% of purchase price = roughly $5,300–$13,250) and an emergency/maintenance reserve. Lenders often want to see some post‑closing reserves. Using all savings for down payment could leave them cash‑poor.
- If they cannot cover closing costs or reserves, options include: negotiate seller‑paid closing costs, roll some costs into the loan (if allowed), lower the down payment (but then pay PMI), or delay purchase to save more.
- If they were not eligible, steps to become eligible: reduce recurring debt (pay down the $582/mo), increase down payment or reduce purchase price, shop for a lower interest rate, extend the term (e.g., 30 vs 15 years), or co‑signer. Also ensure any closing costs and reserves are planned for.

Bottom line: based on the 28/36 rule and a 20% down payment, Rollin and Sandra appear to qualify for the $212,000 mortgage (PITI comfortably below the $1,926/mo back‑end limit in normal interest‑rate scenarios). However, they should not drain all savings for the down payment without accounting for closing costs and having an emergency fund.