Question

1. Would a person with the following income and expenses qualify for a home based on the front end affordability ratio?
Annual gross income = $60,000
Monthly principal and interest payment = $1,000
Monthly home insurance payment = $100
Monthly property tax payment = $100
Monthly credit card payment = $50
Monthly car payment = $250
Monthly student loan payment = $200

You would like to have a 10% down payment for a house valued at $100,000 in 3 years. You plan to put the money in your money market account earning 3%. How much do you need to save per month to reach your goal?

Group of answer choices

$158

$266

$3,325

$3,235

Answer 1

1).

Monthly Gross Income = Annual Gross Income/12

= $60,000/12

= $5000

- Front End ratio is computed by dividing monthly mortgage payments by your monthly gross income. Monthly mortgage payments includes Monthly principal and interest payment, Monthly home insurance payment & Monthly property tax payment. Other debt payments are part of back-end ratio thus it will not be taken for Front end ratio.

Monthly mortgage payments = $1000 + $100 + $100

= $1200

Front-end ratio = Monthly mortgage payments/Monthly Gross Income

= $1200/$5000

= 24%

As the maximum limit for Front end affortibility ratio is 28% and the front-end ratio for perosn is 24%. Thus, he qualify for home based on front end affortibility ratio.

2).

Down-Payment for loan = Loan amount*% of down-paymenty

= $100,000*10%

= $10,000

Calculating the monthly saving need to be made to accumulate $10,000 in 3 years:-

Where, C= Periodic Depsoits

r = Periodic Interest rate = 3%/12 = 0.25%

n= no of periods = 3years*12 = 36

Future Value = $10,000

C = $265.81

So, amount need to save per month to reach your goal is $266

Option 2

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