Question

Cory and Tisha have a total household gross monthly income of $7,000 and monthly debt repayment of $911, what is the maximum mortgage loan amount for which Cory and Tish could qualify? Monthly real estate tax and homeowner’s insurance together are estimated to be $170 per month. Use 4 percent as the current rate of interest and assume a 30-year, fixed rate mortgage.

1. Explain the 28 percent rule, and calculate the mortgage loan amount under the 28 percent rule.

2. Explain the 36 percent rule, and calculate the mortgage loan amount under the 36 percent rule.

3. What other information would be necessary or useful to help Cory and Tisha determine the appropriate loan amount?

Answer 1

Cory and Tisha Gross Monthly income = $7,000
Monthly debt repayment = $911
Monthly real estate tax and homeowner's insurance = $170
Rate of Interest = 4%
Loan tenure = 30 years

28 percent rule : A household should not spend more than 28 % of gros monthly income on their total house hold expenses

Maximum Mortgage Repayment per month = 28% of $7,000 - $170 = $1,790

Maximum Mortgage Amount = Maximum mortgage repayment per month/[rate per month * ((1 + rate per month)^number of monthly payment)/(((1 + rate per month)^number of monthly payment)-1)]
= $1,790/[0.33 * ((1+0.33)^360)/(((1+0.33)^360)-1)]
= $375,000

36 percent rule : A household should not spend more than 36 % of gross monthly income on their total debt payments

Maximum Mortgage Repayment per month = 36% of $7,000 - $911 = $1,609

Maximum Mortgage Amount = Maximum mortgage repayment per month/[rate per month * ((1 + rate per month)^number of monthly payment)/(((1 + rate per month)^number of monthly payment)-1)]
= $1,609/[0.33 * ((1+0.33)^360)/(((1+0.33)^360)-1)]
= $337,000

Other information necessary or useful to help Cory and Tisha to determine the appropriate loan amount would be :

1. Property Value
2. Percentage of downpayment required