Question

Suppose an individual has $62,500 in annual income and considering a home that they intend to finance with a $175,000 mortgage at 5% APR 30-year fixed rate loan, the real estate taxes and insurance are $2,500 per year, auto payments are $300/month, and student loans payments are $350/month. (1) Calculate the two qualification ratios. (2) Would this individual qualify for this loan using a standard 28/36 ratio criteria?

Please show work.

Answer 1

Monthly loan payment is calculated using PMT function in Excel :

rate = 5% / 12   (converting annual rate into monthly rate)

nper = 30*12 (30 year loan with 12 monthly payments each year)

pv = 175000 (loan amount)

PMT is calculated to be $939.44

Front end ratio = (monthly mortgage payment + monthly taxes and insurance) / monthly income

monthly income = annual income / 12 = $62,500 / 12 = $5,208.33

monthly taxes and insurance = annual taxes and insurance / 12 = $2,500 / 12 = $208.33

Front end ratio = ($939.44 + $208.33) / $5,208.33

Front end ratio = 22.04%

Back end ratio = (monthly mortgage payment + monthly taxes and insurance + other monthly debt payments) / monthly income

Back end ratio = ($939.44 + $208.33 + $300 + $350) / $5,208.33

Back end ratio = 34.52%

Yes, this individual qualify for this loan using a standard 28/36 ratio criteria. This is because the front end ratio is lower than 28% and the back end ratio is lower than 36%