You work for a lender that requires a 20% down payment and uses the standard debt-to-income ratio to determine a person's eligibility for a home loan. Of the following, choose the person that you would rate the highest on their eligibility for a home loan.
| | Person A | Person B | Person C | Person D |
| -------- | ---------- | ---------- | ---------- | ---------- |
| home value | $175,000 | $200,000 | $220,000 | $250,000 |
| income | $51,000 | $58,000 | $63,000 | $67,000 |
| savings | $35,000 | $40,000 | $42,000 | $50,000 |
| recurring debt | $350 | $250 | $200 | $450 |
A. Person A
B. Person B
C. Person C
D. Person D
Answer (2)
Calculate the required down payment for each person.
Check if each person's savings is sufficient to cover the required down payment.
Calculate the maximum monthly debt payment each person can afford based on their income and a standard debt-to-income ratio.
Compare the debt-to-income ratios of eligible candidates to determine the most eligible person.
Person B is the most eligible for a home loan because they have sufficient savings and the lowest debt-to-income ratio.
The final answer is b
Explanation
Analyzing the Data First, let's analyze the data for each person to determine their eligibility for a home loan. The lender requires a 20% down payment and uses the standard debt-to-income ratio to determine eligibility.
Calculations for Person A For Person A:
Home Value: $175,000
Income: $51,000
Savings: $35,000
Recurring Debt: $350
Required Down Payment: $175,000 * 0.20 = $35,000 Savings are sufficient to cover the down payment. Maximum Monthly Debt Payment: $0.43 * $51,000 / 12 = $1827.50 Available Monthly Payment: $1827.50 - $350 = $1477.50
Calculations for Person B For Person B:
Home Value: $200,000
Income: $58,000
Savings: $40,000
Recurring Debt: $250
Required Down Payment: $200,000 * 0.20 = $40,000 Savings are sufficient to cover the down payment. Maximum Monthly Debt Payment: $0.43 * $58,000 / 12 = $2078.33 Available Monthly Payment: $2078.33 - $250 = $1828.33
Calculations for Person C For Person C:
Home Value: $220,000
Income: $63,000
Savings: $42,000
Recurring Debt: $200
Required Down Payment: $220,000 * 0.20 = $44,000 Savings are NOT sufficient to cover the down payment ($42,000 < $44,000). Therefore, Person C is not eligible.
Calculations for Person D For Person D:
Home Value: $250,000
Income: $67,000
Savings: $50,000
Recurring Debt: $450
Required Down Payment: $250,000 * 0.20 = $50,000 Savings are sufficient to cover the down payment. Maximum Monthly Debt Payment: $0.43 * $67,000 / 12 = $2400.83 Available Monthly Payment: $2400.83 - $450 = $1950.83
Comparing Eligible Candidates Now, let's compare the eligible candidates (A, B, and D). Person C is not eligible because their savings are less than the required down payment.
To determine the best candidate, we can compare their debt-to-income ratios:
Person A: ($350 * 12) / $51,000 = 0.0824
Person B: ($250 * 12) / $58,000 = 0.0517
Person D: ($450 * 12) / $67,000 = 0.0806
Person B has the lowest debt-to-income ratio (0.0517), which indicates they are the most eligible candidate.
Final Answer Therefore, Person B is the most eligible for a home loan.
Examples
When deciding who is eligible for a loan, lenders look at factors like income, savings, and existing debts. This problem illustrates how lenders use these factors to assess a person's ability to afford a home. For example, if you want to buy a house for $200,000 and need a 20% down payment, you'll need $40,000 in savings. Additionally, lenders ensure your monthly debt payments don't exceed a certain percentage of your income, often around 43%. Understanding these calculations helps you prepare financially when seeking a loan.
Person B is the most eligible for a home loan due to having sufficient savings for the down payment and the lowest debt-to-income ratio compared to others. They have a DTI ratio of 0.0517, making them the most favorable candidate. The final choice is Person B.
;
