Question

Rick and Theresa are trying to qualify for a mortgage on a house for which the total monthly payment (PITI) would be $1,545.15. They earn a combined annual income of $66,000. They have two car loans. The first carries a monthly payment of $205 and has 2 years and 4 months left to go. The second has 9 months left to go, and the monthly payment is $375. They have student loan payments of $114 per month, and the minimum monthly payments on their credit cards total $50.

Do they pass the 28% test? Do they pass the 36% test?

Answer 1

- 28% rule states that a maximum of 28% of the gross annual income can be spent on total housing related Expenses.

Monthly payment of Housing mortgage = $ 1545.15

Yearly Payment of Housing mortgage = $ 1545.15*12

= $18,541.8

Combined Annual Income = $66,000

Amount eligible on Housing mortgage = $66,000*28%

= $ 18,480

Since, the yearly mortgage payment is more than the eligible amount. Hence, they fail the 28% test.

- 36% rule states that a maximum of 36% of the gross annual income can be spent on total debt related Expenses including Housing loan payment, car loan payment or student loan payment etc.

Yearly payment of 2 car loan = ($205*12 months) + ($375*9 months)

= $ 5835

Note- Since, the secod car loan is left for 9 months only, payment for 9 months will only be considered)

Year Student loan payment = $114*12 = $1368

Yearly Credit card payment = $ 500*12 = $6000

Total Annual debt payment = $ 18541.8 + $5835 + $1368 + $ 6000

= $ 31,744.8

Combined Annual Income = $66,000

Amount eligible onTotal Annual debt payment = $66,000*36%

= $ 23,760

Since, the yearly Debt payment is more than the eligible amount. Hence, they fail the 36% test.