Marge and Homer Sampson Have Saved $90,000 Toward the Purchase

question 174

Essay

Marge and Homer Sampson have saved $90,000 toward the purchase of their first home. Allowing $7,000 for legal costs and moving expenses, they have $83,000 available for a down payment.
a) Based only on a loan-to-value ratio of 80%, what is the maximum purchase price they can consider?
b) After thorough investigation, the Sampsons made a $360,000 offer on a townhouse subject to arranging financing. Next they met with their banker. With an $88,000 down payment, the Sampsons will need a mortgage loan of $272,000. The current interest rate on a five-year term fixed-rate mortgage with a 25-year amortization is 5.4% compounded semi-annually. The banker gathered data for calculating the Sampsons' GDS and TDS ratios. Annual property taxes will be $3000. Annual heating costs will be about $2400. The Sampsons make monthly payments of $800 on a car loan ($14,000 balance). Their gross monthly income is $7000. Calculate the GDS and TDS ratios for the Sampsons.
c) Note that the Sampsons meet the GDS criterion (_32%) but exceed the TDS limit (40%). The item causing the problem is the $800 per month car payment. Suppose the Sampsons use $14,000 of their down-payment savings to pay off the car loan. They will still have enough to make the minimum down payment (0.20 × $360,000 = $72,000) but will have to increase the mortgage loan by $14,000 to $286,000. Recalculate the GDS and TDS ratios. Do the Sampsons satisfy all three ratios by taking this approach?

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Definitions:

Fixated

Exhibiting an obsessive or excessive attachment to someone or something, or a developmental state that persists beyond its typical period.

Predictability

The ability to be anticipated or to accurately forecast future events or behaviors based on current knowledge or patterns.

Regularity

The quality or state of being consistent or uniform in procedure, form, or arrangement; often referring to patterns or rhythms in nature or behavior.

Actively Playful

Engaging in activity with energy and enthusiasm, often referring to the lively and spirited manner in children's play.