Scenario Analysis: Mortgage Home Loan Eligibility Calculation

Question

Kirsten Neal is interested in purchasing a new house given that mortgage rates are at a historical low. Her bank has specific rules regarding an applicant’s ability to meet the contractual payments associated with the requested debt. Kirsten must submit personal financial data for her income, expenses, and existing installment loan payments. The bank then calculates and compares certain ratios to predetermined allowable values to determine if it will make the requested loan. The requirements are as follows:

(1) Monthly mortgage payments 28% of monthly gross (before-tax) income.
(2) Total monthly installment payments (including the mortgage payments) 37% of monthly gross (before-tax) income.

Monthly gross (before-tax) income $ 4,500
Monthly installment loan obligations 375
Requested mortgage 150,000
Monthly mortgage payments 1,100

Kirsten submits the following personal financial data:
a. Calculate the ratio for requirement 1.
b. Calculate the ratio for requirement 2.
c. Assuming that Kirsten has adequate funds for the down payment and meets other lender requirements; will Kirsten be granted the loan?

Summary

The question is about mortgage loan eligibility calculations. A person interested in purchasing a house applies for a home loan and her bank reviews her monthly income before tax and its own regulations to check whether or not the person is eligible for a home loan. The calculations are given in the solution.

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