Answer to qualifying the buyer 1: Step 1 – calcula...

2009-11-16T21:41:27.940-08:00

Answer to qualifying the buyer 1:
Step 1 – calculate SMI.
In this example, SMI consists of monthly salary of $3,200 and recognizable secondary income of $240 per month for a total of $3,440.

Step 2 – calculate MHE, starting with PITI and adding PMI in this example.

The mortgage payment, or PI, is calculated using equation 5.

mp=mb0{(cr/12)/[1-(1+(cr/12))-n]} (5)

$614.30=$70,000{(.10/12)/[1-(1+(.10/12))-360]}

On your financial calculator, the keystrokes are as follows:

1 payment/year and “End” mode
N I% PV PMT FV
360 10/12 -$70,000 ? -

and add taxes, T, of $84 and property insurance, I, of $21, and PMI of $24 for a total MHE of $743.30.

Step 3 – calculate TMD by adding other on-going debt payments to MHE

Total monthly debt consists of MHE of $743.30 plus $380 for auto loan 1 and $65 for the bank credit card (note that it will take over 18 payments to payoff a $1,200 balance assuming a 0% interest rate, with a normal credit card interest rate, this $1,200 will definitely be around for a very long time) for a total of $1,188.30. Also note that we did not include auto loan 2, the gas credit card payments, and utility payments.

Step 4 – calculate HER and TDR and make the underwriting decision.

HER = MHE/ SMI with underwriters looking for a ratio of 28% or lower, and

HER = $743.30/$3,440 = .216 or 21.6% which is less than 28% → make the loan

TDR = TMD / SMI with underwriters looking for a ratio of 36% or lower.

HER = $1,188.30 / $3,440 = .345 or 34.5% which is less than 36% → make the loan

The applicant qualifies under both the HER and TDR. Therefore, the analyst would proceed with the underwriting process.

Answer to qualifying the buyer 2:
Step 1 – calculate SMI.
SMI = $2,666.67 per month ($26,000 per year / 12)

Step 2 – calculate MHE, starting with PITI and adding PMI in this example.

The mortgage payment, or PI, is calculated using equation 5.

mp=mb0{(cr/12)/[1-(1+(cr/12))-n]} (5)

$479.29=$57,000{(.095/12)/[1-(1+(.095/12))-360]}

On your financial calculator, the keystrokes are as follows:

1 payment/year and “End” mode
N I% PV PMT FV
360 9.5/12 -$57,000 ? -

and add taxes, T, of $83 and property insurance, I, of $36, and PMI of $17 for a total MHE of $615.31.

MHE = $479.29 + $83 + $36 + $17 = $615.31

Step 3 – calculate TMD by adding other on-going debt payments to MHE

TMD = MHE + other on-going debts

TMD = $479.39 + $550 = $1,029.39

Step 4 – calculate HER and TDR and make the underwriting decision.

HER = MHE / SMI with underwriters looking for a ratio of 28% or lower, and

HER = $615.31 / $2,667.67 = .231 or 23.1% which is less than 28% → make the loan

TDR = TMD / SMI with underwriters looking for a ratio of 36% or lower.

HER = $1,029.39 / $2,667.67 = .38.6 or 38.6% which is MORE than 36% → do not make the loan

The applicant qualifies under the HER, but not the TDR due to a large outstanding auto loan. Therefore, the analyst would recommend to stop the underwriting process and reject the loan application or consider reasons to accept a higher ratio.

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Answer to qualifying the buyer 1: Step 1 – calcula...