Question

The Simpson’s are considering the purchase of a home. They currently have a combined annual gross income of $68,000.

Current Monthly Expenses are as follows:

Car Payment $320

Credit Card$100

Student Loan $220

Their proposed mortgage payment (p&i) will be $820 per month, with an additional $70 per month for private mortgage insurance (PMI).Annual property taxes and homeowner’s insurance are $1,800 and $1,200 respectively.

Complete the below worksheet to calculate the front end and back end ratios.

Gross Monthly Income _____________	Mortgage (P&I)              ________________
	Property Taxes                 _______________
	Homeowner’s Ins.            _______________
	Mortgage Ins. (PMI)             _____________
Total                                 ______________	Total                                     ______________

1-What is the Simpsons’ front end ratio?   _____________

2-What is the Simpsons’ back end ratio?   _____________

3-Based solely on your calculations would the Simpsons qualify for this mortgage?

Answer 1

Gross Monthly Income	Mortgage
68000/12=5666.67	820
	Property Taxes
	1800/12=150
	Homeowners's Ins
	1200/12=100
	Mortgage Ins
	70

1. Front End Ratio=Monthly Housing Expenses/Monthly Income

                            =820+150+100+70/5666.67

                             =1140/5666.67=20.12%

2) Back End Ratio= Monthly Housing Expenses + Other Debt Payments/ Monthly Income

                          =1140+320+100+220/5666.67=

                         =1780/5666.67=31.4117%

3) Yes Simpsons would qualify. As per standard if front and back end ratio is less than 28% and 36% respectively borrower would qualify for loan.

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