FINC $1100-$ Financial Planning

Assignment $2$

Home and Car Financing

Assignment Instructions:

Select ONE partner to work with on this assignment $($alternatively$,$ you can choose to work on this assignment by yourself$).$ Together, you and your partner will complete Part I and Part II below.

Please note the following for this assignment:

$$ Both students will submit only one assignment, in DC Connect.

$$ Your submitted assignment must include both student$$s names and student numbers.

$$ Maximum of $24$ Marks for this entire Assignment $($Part I and II$).$

Additional Notes for Your Submission:

$$ Be sure to include sufficient details $($i$.$e$.$ show your work$)$ in your final submission to explain your answer.

$$ Preferred submission format is electronic and responses can be provided below under each question or in a separate Word or Excel document.

$$

PART I $(12$ Marks$)-$ Chapter #$6$

PART I $($a$)8$ marks

i$.$ List and describe two $(2)$ key similarities between a home equity line of credit and a mortgage. $(4$ marks$)$

ii$.$ List and describe two $(2)$ key differences between a home equity line of credit and a mortgage. $(4$ marks$)$

PART I $($b$)4$ Marks

i$.$ Who determines your credit score? $(1$ mark$)$

ii$.$ List and discuss $3$ criteria that are used to determine an individual$$s credit score. $(3$ marks$)$

Part II $(12$ Marks$)-$ Chapter #$7$

How Much Mortgage Can Your Client Afford?

$$ Assume that you are a bank manager for a large bank in Oshawa.

$$ Jim Smith, a new client of yours, is interested in obtaining a mortgage from you. This will be Jim$$s first home purchase.

$$ Jim has been working full$-$time for $4$ years as an insurance agent. Jim does not have a spouse, partner or children.

$$ Jim$$s real estate agent recently showed him the perfect home. This house is large, beautiful and is located in Jim$$s favorite part of town. Jim$$s real estate agent believes that the current homeowners will agree to sell their home for $$450,000.$ Jim has $$50,000$ in cash to pay as a down payment on the home. Jim will need to obtain a mortgage to pay for the remainder of the home.

$$ You were able to obtain Jim$$s credit report and noticed that his only form credit, pertains to his Visa card which he has always paid on time since he first obtained his Visa card $7$ years ago. You also note on the credit report this is only the second time a request has been made for his credit report $($the first time was several years ago when Jim was looking to rent a condo, however, he did not further pursue this$).$

After discussing these facts with Jim, you provide him with the following suggestions:

$$ You recommend to Jim that the mortgage be amortized over $25$ years.

$$ You also recommend a five$-$year, fixed mortgage, in order to lock in the current interest rate for $5$ years, in case interest rates increase further, later in the year. The current five$-$year fixed mortgage interest rate is $4$ percent, compounded semi$-$annually.

Additional information pertaining to Jim$$s mortgage application includes the following:

$$ Jim$$s credit score is $690.$

$$ Jim$$s monthly gross income is $$4,800.$

$$ The expected monthly mortgage payments will be $$2,210$ per month on a mortgage of $$400,000,$ at $4\%$ per year for $5$ years.

$$ Other monthly expenses related to the house are expected to be as follows:

$$ heating costs $=$ $$140$;

$$ property taxes $=$ $$450$; and,

$$ Jim also pays around $$500$ per month towards his Visa debt $($which is currently $nil at the end of the previous billing period$).$ In general, Jim tries to avoid using his Visa whenever possible. His current credit limit is $$5,000.$

$$ Assume that you will use the following two key criteria to determine whether you can offer Jim a mortgage of $$400,000$:

$$ Jim$$s current credit score, and

$$ Results of your analysis of Jim$$s debt ratio.

REQUIRED:

Part II $($a$)6$ Marks

i$.$ In your own words, define the term $$credit score$.(0\mathrm{.}5$ marks$)$

ii$.$ List and describe the five $(5)$ factors that were $/$ would have been used to determine Jim$$s credit score. $(5$ marks$)$

iii. Conclude on the acceptability of Jim$$s credit score with respect to obtaining a mortgage. $(0\mathrm{.}5$ marks$)$

Part II $($b$)6$ Marks

i$.$ In your own words, describe the formula used to calculate the client$$s Gross Debt Service Ratio $($GDSR$).(1$ mark$)$

ii$.$ Calculate Jim$$s GDSR$.(4$ marks$)$

iii. Conclude on the results of your ratio calculation. $(1$ m