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 mortgage payment the Taylor family can afford, we need to consider the conventional mortgage guidelines for debt-to-income ratios.
Typically, conventional mortgage lenders use two ratios: the Front-End Ratio (or Housing Ratio) and the Back-End Ratio (or Total Debt Ratio). The Front-End Ratio focuses on housing-related expenses, while the Back-End Ratio includes all monthly debt obligations.
1. Front-End Ratio: This ratio takes into account the percentage of the gross monthly income that can be allocated towards housing expenses. Usually, the maximum Front-End Ratio is around 28%.
To calculate the maximum monthly housing expense, multiply the gross monthly income by the Front-End Ratio:
Front-End Ratio = 28%
Maximum Monthly Housing Expense = Gross Monthly Income * Front-End Ratio
In this case, Gross Monthly Income = $3,500.
Maximum Monthly Housing Expense = $3,500 * 0.28 = $980
Therefore, according to the Front-End Ratio, the Taylor family can afford a maximum monthly mortgage payment of $980.
2. Back-End Ratio: This ratio considers the total debt payments (including housing expenses) as a percentage of the gross monthly income. Generally, the maximum Back-End Ratio is around 36%.
To calculate the maximum monthly debt payments, including housing expenses, multiply the gross monthly income by the Back-End Ratio:
Back-End Ratio = 36%
Maximum Monthly Debt Payments = Gross Monthly Income * Back-End Ratio
In this case, Gross Monthly Income remains $3,500.
Maximum Monthly Debt Payments = $3,500 * 0.36 = $1,260
Now, we need to subtract the existing monthly installment loan payments from the maximum monthly debt payment to find the affordable mortgage payment. The monthly installment loan payment is $750.
Affordable Mortgage Payment = Maximum Monthly Debt Payments - Existing Monthly Installment Loan Payments
Affordable Mortgage Payment = $1,260 - $750 = $510
Therefore, if the Taylor family has existing monthly installment loan payments totaling $750 on two car loans, their affordable maximum monthly mortgage payment would be $510.
Remember that these calculations are based on conventional mortgage guidelines and lenders may have additional criteria or variations specific to their lending policies. It is always advisable to consult with a mortgage professional for accurate and personalized information.