Capital structure Kirsten Neal is interested in purchasing a new house given that mortgage rates are…

| January 23, 2015

Capital structure Kirsten Neal is interested in purchasing a new house given that mortgage rates are at a historical low. Her bank has specific rules regarding anapplicant’s ability to meet the contractual payments associated with the requested debt. Kirsten must submit personal financial data for her income, expenses, and existing installment loan payments. The bank then calculates and compares certain ratios to predetermined allowable values to determine if it will make the requested loan. The requirements are as follows:

(1) Monthly mortgage payments <28% of monthly gross (before-tax) income. (2) Total monthly installment payments (including the mortgage payments) <37% of monthly gross (before-tax) income. Kirsten submits the following personal financial data:

Monthly gross (before-tax) income $ 4,500
Monthly installment loan obligations 375
Requested mortgage 150,000
Monthly mortgage payments 1,100

a. Calculate the ratio for requirement 1.

b. Calculate the ratio for requirement 2.

c. Assuming that Kirsten has adequate funds for the down payment and meetsother lender requirements, will Kirsten be granted the loan?

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