Question

Using the maximum ratios for a conventional mortgage, how big a monthly payment could the Danforth family afford if their gross (before-tax) monthly income amounted to $5,500?

Would it make any difference if they were already making monthly installment loan payments totaling $650 on two car loans?
Maximum mortgage payment they could make would be $  

Answer 1

The maximum ratio pertaining to a conventional mortgage is referred as the 28/36 rule. This ruling is applied by the lenders to approve credit applications. Such a ratio determines the total amount of debt a household can safely take as per their income and lifestyle. In this regard, the traditional lenders prefer a maximum threshold of expense (household) -to-income ratio of 28% and total debt-to-income ratio of 36% for approving the disbursement of credit. The application of 28/36 rule for the given case has been illustrated below as follows:

Monthly Gross	$      5,500
28%	$      1,540	Front end ratio (Includes Principal, Interest, Taxes and Insurance)
36%	$      1,980	Back end ratio or debt to income ratio
Amount which can be used for making other types of loans	$          866	On applying the 28/36 rule the back-end amount should be split according to this ratio
Amount which can be used for monthly mortgage payment	$      1,114

Based on the given scenario, the Danforth family can afford $1,114 for monthly mortgage payment and $866 for making other types of loans. This suggests that even if they were making a monthly installment for loan payment totaling $650, the maximum ratios for a conventional mortgage would still be adhered as the family can afford to budget $866 for making other types of loans.