Next week, your friends Paloma and Anthony want to apply to the Fourth Global Bank for a mortgage loan. They are considering the purchase of a home that is expected to cost $125,000. To prevent their possible embarrassment at the bank, and given your knowledge of personal finance, they’ve asked you to help answer the following questions by completing the home affordability worksheet that follows: • What is the minimum and maximum annual housing expense allowable by the bank, given Paloma and Anthony’s combined annual income?
• What is the minimum and maximum total monthly debt obligation allowable by the bank, given Paloma and Anthony’s combined monthly income?
• Given their existing debt obligations, what is the maximum additional mortgage obligation that Paloma and Anthony can reasonably expect the bank to consider next week?
To assist in the preparation of the worksheet, Paloma and Anthony have collected the following information:
• Their financial records report a combined gross, before tax, annual income of $125,000, and current (pre-mortgage) installment loan, credit card and car loan, debt of $1,823 per month.
• Their best estimate of the interest rate on the new mortgage is 7.5%, and they are interested in obtaining a 15-year loan.
• They have accumulated savings of $32,500 that can be used to satisfy the home’s down payment and closing costs.
• The lender requires a minimum 20% down payment.

Home Affordability Worksheet
Based on the Front-end ratio High Value Low Value Amount
1. Annual income
2. Lender’s front-end income affordability ratio 29% 25%
3. Maximum allowable annual housing (PITI) payment
4. Maximum allowable monthly housing (PITI) payment
Based on the Back-end ratio
5. Monthly income
6. Existing monthly installment payments
7. Existing monthly installment payments as percentage of monthly income
%
8. Lender’s monthly installment loan affordability ratio 41% 33%
9. Maximum amount of total monthly affordable installment debt
10. Maximum monthly mortgage payment (PITI), given existing debt payments