Real Estate Math Problem

Math problems dealing with real estate, debt and income can be a little tricky, but fun and extremely useful in the real world! Check out this real estate math problem to see if you can find the solution!

This puzzle is a DTI–Debt-to-Income–problem that banks usually utilize to calculate whether or not a potential borrower will be able to pay back the loan.

Background Info: Mr. and Mrs. Abrams have a combined yearly income of $90,000. They would like to purchase a commercial property on which to start a business for $215,000. They have spoken with a potential lender, who indicated they can provide a $200,000, 30 year loan at 7% interest if the Abrams can qualify. In addition to the property payment, the Abrams estimate their taxes and insurance to be $145 per month. Mr. Abrams has a student loan payment of $67 a month and Mrs. Abrams has a car payment of $347 a month. Assume an amortization factor of 6.65.

Question: Will the Abrams be able to qualify for this loan?

Do your own calculations, and then check below for the right steps and the correct answer.

Step One: Calculate their monthly income by dividing $90,000 by twelve. Their monthly income is then $7,500.

Step Two: Calculate their property payment by taking into account the amortization factor for a 30 year long at 7%. Their estimated monthly payment is $200 multiplied by 6.65 amortization factor, leaving them with a $1330 monthly payment.

Step Three: Calculate their total PITI and monthly debt. The $1300 a month, added to the $145 month, means their monthly expenses are $1475 per month. Their total monthly expenses then include the $1475, plus their $67 and $347 payments, bringing them to $1889.

Step Four: Calculate their Debt to Income Ratios. The first ratio is the $1475 expense versus their $7500 income, meaning that they are under the 28% threshold the bank requires. Their full expenses of $1889 versus their $7500 monthly income is just over 25%, which is still well below the 36% the bank requires.

Solution: Their percentage of monthly income to monthly debt is high enough that they do qualify for the loan!

Danielle is a math whiz with a keen interest in real estate, checking on prices of land for sale in her area and calculating the probability of being approved for loans.

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Vineet Patawari

Hi, I'm Vineet Patawari. I fell in love with numbers after being scared of them for quite some time. Now, I'm here to make you feel comfortable with numbers and help you get rid of Math Phobia!

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