Luis wants to buy a home priced at $315,000. He plans to finance this amount less the down payment required. His mortgage payment would then be $2100. Luis has an annual income of $91,500 and $65,000 in savings. Luis has a car payment of $370, a student loan payment of $165 and a credit card payment of $45. Use a 20% down payment and the 28/36 ratio to determine if Luis is eligible for a loan. What would you advise him to do if he is not eligible?
Luis wants to buy a home priced at 315.Hismortgagepaymentwouldbebe
- Luis has an annual income of 91000 and 65000 in savings
Luis has a car payment of 370 a student loan payment of
165 and a credit card payment of $45. Use a 20% down payment and the 28/36 ratio to determine if Luis is eligible for a loan. What would you advise him to do if he is not eligible
The Correct Answer and Explanation is:
To determine whether Luis is eligible for a mortgage under the 28/36 rule, we follow these steps:
Step 1: Calculate the Down Payment and Loan Amount
- Home price = $315,000
- Down payment (20%) = 0.20 × $315,000 = $63,000
- Mortgage loan needed = $315,000 – $63,000 = $252,000
Step 2: Gross Monthly Income
- Annual income = $91,500
- Monthly income = $91,500 ÷ 12 = $7,625
Step 3: Apply the 28/36 Rule
- The 28% rule limits housing expenses (principal, interest, taxes, insurance, aka PITI) to 28% of gross monthly income:
28% × $7,625 = $2,135 max allowable mortgage payment - The 36% rule limits total debt (PITI + all other debts) to 36% of gross monthly income:
36% × $7,625 = $2,745 max allowable total monthly debt
Step 4: Check Luis’s Debts
- Mortgage payment = $2,100
- Car payment = $370
- Student loan = $165
- Credit card = $45
- Total debt = $2,100 + $370 + $165 + $45 = $2,680
Step 5: Compare with 28/36 Rule
- $2,100 ≤ $2,135 ✅ (passes the 28% test)
- $2,680 ≤ $2,745 ✅ (passes the 36% test)
✅ Conclusion: Luis is eligible for the loan.
✍️ Explanation
Luis is looking to buy a home priced at $315,000 and has $65,000 in savings. With a 20% down payment ($63,000), his mortgage amount would be $252,000. His monthly mortgage payment is estimated at $2,100. To determine his eligibility for the loan, we apply the 28/36 rule, a standard used by lenders to assess how much debt a borrower can safely take on.
The 28% rule limits housing costs to 28% of the borrower’s gross monthly income, while the 36% rule limits all debt obligations, including housing, to 36%. Luis earns $91,500 annually, which breaks down to $7,625 per month. Using the 28% rule, his monthly housing expenses shouldn’t exceed $2,135. His projected mortgage payment of $2,100 falls just under this limit, so he meets the housing expense requirement.
Next, considering all his debt obligations—his $2,100 mortgage payment, $370 car payment, $165 student loan, and $45 credit card payment—Luis has a total monthly debt of $2,680. This is under the 36% debt-to-income limit of $2,745, meaning he also passes the total debt requirement.
Because he meets both the 28% and 36% criteria, Luis qualifies for the loan based on his income, expenses, and proposed housing cost. If he had not qualified, a good strategy would be to either increase his down payment to reduce the mortgage amount or pay off some existing debts like the car or student loan. Either of these actions would lower his monthly debt and improve his debt-to-income ratios.
