Question: You are applying for a conventional mortgage from the Americana Bank. Your monthly gross income is $3,500, and the bank uses the 28% housing expense ratio guideline.
a. What is the highest PITI for which you can qualify? Hint: Solve the housing expense ratio formula for PITI. Remember, this is an application of the percentage formula, Portion 5 Rate 3 Base, where PITI is the portion, the expense ratio is the rate, and your monthly gross income is the base.
b. Based on your answer from part a, if you are applying for a 30-year, 9% mortgage and the taxes and insurance portion of PITI is $175 per month, use Table 14-1 to calculate the size of the mortgage for which you qualify. Hint: Subtract TI from PITI. Divide the PI by the appropriate table factor to determine the number of $1,000s for which you qualify.
c. Based on your answer from part b, if you are planning on a 20% down payment, what is the most expensive house you can afford? Hint: Use the percentage formula again. The purchase price of the house is the base, the amount financed is the portion, and the percent financed is the rate.