Using the maximum ratios for a conventional mortgage, how big a monthly payment could the Taylor family afford if their gross ( before- tax) monthly income amounted to $ 3,500? Would it make any difference if they were already making monthly installment loan pay-ments totaling $ 750 on two car loans?
To determine the maximum monthly payment the Taylor family can afford for a conventional mortgage, we need to consider the maximum ratios typically used by lenders. These ratios include the front-end ratio and the back-end ratio.
1. Front-end ratio: This ratio accounts for the percentage of a borrower's gross monthly income that goes towards housing expenses, including the mortgage principal, interest, taxes, and insurance (PITI). Lenders typically have a maximum front-end ratio of around 28%.
To calculate the Taylor family's maximum allowable front-end ratio, we can multiply their gross monthly income by 28%:
Front-end ratio = Gross monthly income * 0.28
= $3,500 * 0.28
= $980
2. Back-end ratio: This ratio considers the percentage of a borrower's gross monthly income that goes towards all monthly debt obligations, including the mortgage payment, car loans, and other debts. Lenders generally have a maximum back-end ratio of around 36%.
To calculate the Taylor family's maximum allowable back-end ratio, we need to consider their existing car loan payments as well. Subtracting these car loan payments from their gross monthly income gives us their remaining monthly income available for housing expenses:
Remaining income = Gross monthly income - Car loan payments
= $3,500 - $750
= $2,750
Now, we can calculate the maximum allowable back-end ratio by multiplying their remaining income by 36%:
Back-end ratio = Remaining income * 0.36
= $2,750 * 0.36
= $990
To determine the maximum monthly mortgage payment the Taylor family can afford, we can take the smaller value between the front-end ratio and the back-end ratio:
Maximum mortgage payment = min(Front-end ratio, Back-end ratio)
= min($980, $990)
= $980
Therefore, the Taylor family can afford a maximum monthly mortgage payment of $980, given their gross monthly income of $3,500.
Additionally, the car loan payments do affect the maximum mortgage payment the Taylor family can afford. By subtracting the car loan payments from their gross monthly income, their remaining income available for housing expenses decreases, thus reducing the maximum mortgage payment.