Question

Bill and Terry Noke are considering buying a house and need to figure out what they can afford and what a bank will lend them. Their adjusted gross income is $175,988. Their monthly mortgage payment for the house they want would be $1,644. Their annual property taxes would be $9,888, and the homeowner's insurance premium would cost them $1,070 per year. They have a $610 per month car loan, and their average monthly credit card bill is $4,200. Would the bank lend them $210,000 to purchase their house.

Answer 1

Explanation:

To determine if the bank would lend Bill and Terry $210,000 to purchase their house, we need to calculate their debt-to-income (DTI) ratio, which is a measure of their total monthly debt payments compared to their monthly income. Banks typically use DTI as a factor in determining how much they will lend to borrowers.

First, we need to calculate their total monthly debt payments:

Monthly mortgage payment: $1,644

Monthly property taxes: $9,888 / 12 = $824

Monthly homeowner's insurance premium: $1,070 / 12 = $89

Car loan payment: $610

Credit card bill: $4,200

Total monthly debt payments = $1,644 + $824 + $89 + $610 + $4,200 = $7,367

Next, we need to calculate their monthly income:

Adjusted gross income: $175,988 / 12 = $14,666

Now we can calculate their DTI ratio:

DTI = Total monthly debt payments / Monthly income

DTI = $7,367 / $14,666

DTI = 0.502 or 50.2%

A DTI ratio of 50.2% is quite high, and many banks may be hesitant to lend to borrowers with such a high DTI. Generally, banks prefer borrowers to have a DTI ratio of 43% or lower.

Therefore, based on their current debt and income situation, it is unlikely that the bank would lend Bill and Terry $210,000 to purchase their house. They may need to consider reducing their debt payments or increasing their income to improve their chances of being approved for a mortgage loan.