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 payment = $911
Monthly real estate tax and Home owner's insurance = $170
Rate of interest = 4%
Loan tenure = 30 years

28 percent rule : A household should not spend more than 28% of their gross monthly income on total housing expenses

with 28% rule, maximum EMI could be paid by Cory and Tisha = 28% of $7,000 - $170 = $1,790

Maximum Mortgage amount = Maximum EMI / [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 their gross monthly income on total debt servicing

with 36% rule, Maximum EMI could be paid by Cory and Tisha = 36% of $7,000 - $911 = $1,609

Maximum Mortgage amount = Maximum EMI / [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 :

1. Property Value
2. Down payment percentage required