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 — down payment and loan amount
- 20% of $265,000 = $53,000. They have saved $53,000, so they can make the 20% down payment exactly.
- Loan amount = $265,000 − $53,000 = $212,000.

Step 2 — monthly income and ratio limits
- Gross monthly income = $83,600 / 12 = $6,966.67.
- 28% front‑end (max housing PITI) = 0.28 × 6,966.67 = $1,950.67/month.
- 36% back‑end (total debt) = 0.36 × 6,966.67 = $2,508.00/month.
- Subtract recurring debt $582 from the back‑end limit: available for housing = 2,508 − 582 = $1,926.00/month.

So the effective maximum housing payment they can qualify for = the smaller of the two = $1,926/month.

Step 3 — compare to expected mortgage payment
We need principal & interest (P&I) on $212,000. (Taxes, insurance and any HOA would be added to get full PITI; PMI is not required with 20% down.)

Examples at common 30‑year rates:
- At 6.0% (30‑yr): P&I ≈ $1,271/month.
- At 7.0% (30‑yr): P&I ≈ $1,410/month.

Add estimated taxes and insurance (example: property tax ~1% of value ≈ $2,650/yr ≈ $221/mo, insurance ~$100/mo) → extra ≈ $320/month.
Total PITI estimates:
- 6.0% case: 1,271 + 320 ≈ $1,591/month.
- 7.0% case: 1,410 + 320 ≈ $1,730/month.

Both example PITI totals are below the allowed $1,926/month, so under standard 28/36 guidelines they would qualify.

Important practical notes and advice
- They currently would be using their entire $53,000 savings for the down payment. Typical closing costs and prepaid items run several thousand dollars (2–5% of price), and lenders often expect some reserves (and you want an emergency fund). With zero cash left for closing costs/reserves, lenders may be reluctant or the buyers will need seller concessions or gift funds to cover closing costs.
- Recommendation:
- Don’t spend all savings on the down payment: save additional funds for closing costs and 2–3 months of mortgage reserves.
- If they cannot come up with extra for closing costs/reserves, consider: negotiating seller paid closing costs, asking for a lender credit (which raises the interest rate), or choosing a slightly lower‑priced home.
- If they had trouble qualifying (if their PITI had exceeded $1,926): options would be reduce recurring debt, increase down payment, buy a cheaper house, or add another qualifying income source.

Bottom line: By the 28/36 ratios, with a $212,000 loan they should qualify. However, because their savings equal exactly the 20% down and leave no cash for closing costs or reserves, I’d advise they either save a bit more (or arrange seller/lender help for closing costs) before going forward.