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 — loan & monthly gross income
- Sales price = $265,000. With 20% down: down payment = 0.20 × 265,000 = $53,000.
- Loan amount = 265,000 − 53,000 = $212,000.
- Monthly gross income = 83,600 / 12 = $6,966.67.

Step 2 — 28/36 rule limits
- 28% housing limit = 0.28 × 83,600 / 12 = $1,950.67 per month (maximum PITI).
- 36% total-debt limit = 0.36 × 83,600 / 12 = $2,508.00 per month.
- Subtracting recurring debt ($582) from the 36% cap gives a housing limit of 2,508 − 582 = $1,926.00.
- Effective maximum allowed housing payment = min(1,950.67, 1,926.00) = $1,926.00 per month.

Step 3 — estimate expected PITI for the $212,000 mortgage
We need principal & interest (depends on rate and term) plus taxes and insurance. Using common assumptions:
- Property tax ≈ 1.0% of price → 0.01 × 265,000 = $2,650/yr → $220.83/mo.
- Home insurance ≈ 0.35% of price → $927.50/yr → $77.29/mo.
- Taxes + insurance ≈ $298/mo.

Compute P&I for a 30‑year fixed mortgage (examples):
- At 6.0% → P&I ≈ $1,270.50 → PITI ≈ 1,270.5 + 298 = $1,568.50/mo.
- At 7.0% → P&I ≈ $1,411.80 → PITI ≈ $1,709.80/mo.
- At 8.0% → P&I ≈ $1,555.50 → PITI ≈ $1,853.50/mo.

All three examples produce PITI below the effective cap of $1,926/mo. (Rates would need to be very high — roughly ~9% or more in these simple estimates — before PITI exceeds the cap.)

Bottom line
- With a 20% down payment ($53,000) and the stated recurring debt, Rollin and Sandra can afford the $265,000 home under the 28/36 rule for typical current 30‑year mortgage rates. They appear eligible.

If they were not eligible (or to strengthen their position)
- Increase down payment (reduce loan amount).
- Pay down or eliminate recurring debt to raise the allowable housing payment under the 36% rule.
- Buy a lower‑priced home.
- Shop for a lower interest rate (improves affordability) by improving credit score or locking in a competitive lender rate.
- Consider a longer term (30‑yr vs 15‑yr) to lower monthly P&I (but expect more interest over the life of the loan).
- Consider a co-borrower or other sources of qualifying income.
- Reduce estimated taxes/insurance (e.g., buy in a lower‑tax area or get multiple insurance quotes), or ask seller concessions.

If you want, I can: (a) run the exact PITI for a specific interest rate/term you expect or (b) compute the maximum loan amount they could carry at a given rate under the 28/36 limits.