B. 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 amount to $3,500? Would it make any differences if they were already making monthly installment loan payments 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: The front-end ratio is the percentage of the monthly income that can be allocated to housing expenses, including mortgage payments, property taxes, and homeowner's insurance. Lenders generally prefer this ratio to be no more than 28% of the gross monthly income.
Front-end ratio = (Gross monthly income) x (Front-end ratio percentage)
Front-end ratio = $3,500 x 0.28
Front-end ratio = $980
So, the maximum amount the Taylor family can allocate towards housing expenses is $980 per month.
2. Back-end ratio: The back-end ratio includes all monthly debt payments, including housing expenses, car loans, credit card payments, and other loan installments. Lenders usually prefer this ratio to be no more than 36% of the gross monthly income.
Back-end ratio = (Gross monthly income) x (Back-end ratio percentage)
Back-end ratio = $3,500 x 0.36
Back-end ratio = $1,260
No, it makes a difference if the Taylor family is already making monthly installment loan payments totaling $750 on two car loans. These car loan payments need to be considered in the calculation of the maximum mortgage payment the Taylor family can afford.
Maximum mortgage payment = (Gross monthly income) x (Back-end ratio percentage) - (Total car loan payments)
Maximum mortgage payment = $3,500 x 0.36 - $750
Maximum mortgage payment = $1,260 - $750
Maximum mortgage payment = $510
Therefore, taking into account their current car loan payments, the maximum monthly mortgage payment the Taylor family can afford is $510.
To determine the maximum monthly payment the Taylor family could afford for a conventional mortgage, we will use the maximum ratios typically used by lenders. These ratios are:
1. The Front-End Ratio: This ratio includes the mortgage payment and typically includes other housing expenses such as property taxes and insurance. The maximum front-end ratio is usually around 28% of the monthly gross income.
2. The Back-End Ratio: This ratio includes all monthly debt payments, such as car loans, credit card payments, and student loans, in addition to the mortgage payment. The maximum back-end ratio is usually around 36% of the monthly gross income.
Let's calculate the maximum monthly payment the Taylor family could afford:
1. Front-End Ratio:
Maximum front-end ratio = 28% of gross monthly income
Maximum front-end payment = (28% / 100) * $3,500
2. Back-End Ratio:
Maximum back-end ratio = 36% of gross monthly income
Maximum back-end payment = (36% / 100) * $3,500
Next, we need to determine if the Taylor family's existing car loan payments would affect their ability to afford the maximum mortgage payment:
Total car loan payments = $750
If the Taylor family's existing car loan payments are less than the difference between the maximum back-end payment and their current back-end payment, then it would not make a difference in their ability to afford the maximum mortgage payment.
If the Taylor family's existing car loan payments exceed the difference between the maximum back-end payment and their current back-end payment, then they would need to consider this amount while calculating their maximum mortgage payment.
For example, if the difference between the maximum back-end payment and their current back-end payment is $500, but their total car loan payments are $750, they would need to subtract the excess $250 from the maximum mortgage payment they can afford.
It is essential to consider the Taylor family's specific financial situation and consult with a mortgage lender to get an accurate estimate of their maximum monthly payment based on their income, debts, and other factors.