loan affordability

Loan Affordability
Student’s Name
Institution Affiliation
Abstract
Loan affordability is determined by various factors, which the lending institutions use to access the eligibility of an individual to receive a loan. The main yardstick in determining individual loan affordability is their level of income, expenses, outstanding loans, and the debt ratio. Seeking a good credit score provides a higher probability for one to receive a loan in future. Notably, when seeking a loan approval, one must calculate their front-end ratio, which includes their principal, interest, taxes and insurance PITI. This ratio should not exceed 28 percent in case one requires a loan. Also, one must calculate their back-end ratio that involves their outstanding loans and debts. Any debt-to-income ratio that exceeds 50 percent affects one’s affordability to a loan from any institution. Lenders may be lenient in considering the front-end ratio but are more interested in the back-end ratio, which determines the total loans and debt an individual possess and their ability to repay the loan they intend to take. As such, for one to afford a loan, they must have a significant low back-end ratio.
Keywords: affordability, front-end ratio, back-end ratio, lenders
Loan Affordability
Taking a loan to buy a car can be complicated, and various factors must be taken into consideration to help predict the current and future financial situation. In the process of getting a loan, lenders determine the affordability criteria by focusing on the PITI (principal, interest, taxes, and insurance) which should maintain a certain level for one to qualify for a loan (Goodman, Seidman & Zhu, 2015).

Considering the case of Joe Bob ability to afford the buying a car, we must find his front end ration and the back-end ratio
Front-end ratio= DTI (debt-to-income) ratio
Monthly income =3500
Mortgage =900
Student’s loan repayment = 350
DTI= (total expenses/ monthly income) x 100
(900/3500) = 0.257 x100
DTI = 25.7%
Back-end ratio = (total monthly debt / monthly income) x 100
(350+900/3500) x 100
Back-end ratio = 35.70%
As indicated by the results obtained from the front-end and back-end ratio, Joe Bob is eligible to take another loan. This is because his DTI stands at 25.7%, which is within the required affordability rate of no more than 28%. His back-end ratio is 35.7%, which is within the affordability rates of not more than 36%. Therefore, Joe Bob can afford another loan to purchase his car.
Joe can follow the affordability formulas in case his front-end and back-end ration exceed the required stands or change the nature of his loan that would influence his interest rate for the loan.
Taking the car loan will not have a significant impact on his other priorities. However, he will still need to readjust to compensate on the repayment of the loan by cutting in certain expenses, and the increase is income to accommodate the repayment of the loan and the mortgage.
Reference
Goodman, L. S., Seidman, E., & Zhu, J. (2015). VA Loans Outperform FHA Loans–Why? And What Can We Learn? Journal of Fixed Income, 24(3), 39–51