Financial Ratios Quiz
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Financial Ratios Quiz

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@BonnyPine

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Questions and Answers

What is the formula to calculate the front-end ratio?

  • Front-End Ratio = Total Monthly Income / Total Monthly Housing Costs
  • Front-End Ratio = Total Monthly Housing Costs / Monthly Gross Income (correct)
  • Front-End Ratio = Monthly Gross Income / Total Monthly Housing Costs
  • Front-End Ratio = Total Monthly Housing Costs / Total Monthly Income

    • What is the total amount of monthly housing costs for Jermaine and LaBrea?

  • $2,199.67 (correct)
  • $2,099.67
  • $2,829.01
  • $2,415.34

    • What does the back-end ratio include that the front-end ratio does not?

  • The down payment percentage
  • Total monthly debt expenses (correct)
  • Only basic housing expenses
  • Only the principal and interest payments

    • Given their gross incomes, what is their total gross monthly income?

    <p>$8,500</p> Signup and view all the answers

    Should Jermaine and LaBrea qualify for the mortgage based on typical lending criteria?

    <p>Yes, their ratios suggest they can afford it.</p> Signup and view all the answers

    Match the following terms with their correct definitions related to mortgage qualifications:

    <p>Front-end ratio = Percentage of gross income used for housing costs Back-end ratio = Percentage of gross income used for total debt obligations Private mortgage insurance = Insurance that protects lenders if borrowers default Down payment = Initial upfront payment of a percentage of the home cost</p> Signup and view all the answers

    Match the following monthly expenses with their corresponding amounts for Jermaine and LaBrea:

    <p>Car payment #1 = $200 Car payment #2 = $150 Personal Loan = $100 Revolving charge cards = $125</p> Signup and view all the answers

    Match the following income sources with their amounts for Jermaine and LaBrea:

    <p>Jermaine's monthly gross income = $5,500 LaBrea's monthly gross income = $3,500 Total monthly income = $9,000 Total monthly mortgage payment = $2,199.67</p> Signup and view all the answers

    Match the following mortgage costs with their types:

    <p>Principal and interest = Ongoing payments towards the loan amount and interest Homeowners insurance = Protection against damages to the home Real estate taxes = Taxes paid to local government based on property value Private mortgage insurance = Cost added for lower down payment risk</p> Signup and view all the answers

    Match the following calculations to the appropriate mortgage ratio:

    <p>Front-end ratio formula = (Total housing costs / Gross monthly income) x 100 Back-end ratio formula = (Total debt payments / Gross monthly income) x 100 Total housing costs = Principal and interest + insurance + taxes + PMI Total debt payments = Total housing costs + other debts</p> Signup and view all the answers

    Study Notes

    Front-end ratio

    • Front-end ratio is calculated by dividing the total monthly housing expense by the gross monthly income.
    • Front-end ratio = total monthly housing expense / gross monthly income
    • Total monthly housing expense = principal and interest payment, homeowner's insurance, real estate taxes, and private mortgage insurance.
    • Magoro's total monthly housing expense is 2,199.67+2,199.67 + 2,199.67+215.67 = $2,415.34
    • Magoro's total gross monthly income is 5,500+5,500 + 5,500+3,500 = $9,000
    • Magoro's front-end ratio is 2,415.34/2,415.34 / 2,415.34/9,000 = 0.2684 or 26.84%

    Back-end ratio

    • Back-end ratio is calculated by dividing the total monthly debt obligations by the gross monthly income.
    • Back-end ratio = total monthly debt obligations / gross monthly income
    • Total monthly debt obligations include debt payments, such as car payments, personal loan payments, and revolving charge card payments.
    • Magoro's total monthly debt obligations are 200+200 + 200+150 + 100+100 + 100+125 = $575
    • Magoro's total gross monthly income is $9,000
    • Magoro's back-end ratio is 575/575 / 575/9,000 = 0.0639 or 6.39%

    Can they Afford Their Dream Home?

    • Lenders usually want the front-end ratio to be less than 28% and the back-end ratio to be less than 36%.
    • Magoro's front-end ratio is 26.84% and their back-end ratio is 6.39%.
    • Based on the ratio information, Magoro should qualify for a mortgage.

    Home Purchase Scenario

    • Jermaine and LaBrea Magoro want to buy a home for $405,000.
    • They can only afford a 15% down payment, which is $60,750.
    • They will need a mortgage loan for $344,250.
    • Their estimated monthly mortgage payments, including principal, interest, homeowners insurance, and real estate taxes, are $2,199.67.
    • They will also pay $215.67 for private mortgage insurance (PMI) because they are putting down less than 20%.
    • Jermaine earns 5,500permonth,andLaBreaearns5,500 per month, and LaBrea earns 5,500permonth,andLaBreaearns3,500 per month.
    • Their combined monthly gross income is $9,000.
    • Their monthly debt payments are:
      • $200 for car payment #1
      • $150 car payment #2
      • $100 for a personal loan
      • $125 for revolving charge cards
      • $2,199.67 for the estimated mortgage payment
      • $215.67 for PMI
    • The total monthly debt payments are $2,890.34.

    Front-End Ratio

    • Formula: (Housing Costs/Gross Monthly Income) x 100
    • Housing Costs = Estimated Mortgage Payment + Homeowners Insurance + Real Estate Taxes + PMI = 2,199.67+2,199.67 + 2,199.67+215.67 = $2,415.34.
    • Calculation: (2,415.34/2,415.34/2,415.34/9,000) x 100 = 26.84%

    Back-End Ratio

    • Formula: (Total Monthly Debt Payments/Gross Monthly Income) x 100
    • Calculation: (2,890.34/2,890.34/2,890.34/9,000) x 100 = 32.12%
    • Note: The loan officer has not yet assessed the front-end and back-end ratios to see if they qualify for the loan.

    Affordability

    • The front-end ratio is 26.84% and the back-end ratio is 32.12%.
    • It is not possible to determine if Jermaine and LaBrea can afford the home without knowing the lender's requirements for these ratios.
    • Most conventional lenders prefer a front-end ratio of 28% and a back-end ratio of 36%.
    • Their front-end ratio is within the lender's guidelines, but their back-end ratio is slightly higher.
    • It is recommended to use a mortgage calculator to determine affordability based on the lender's specific requirements.

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    Description

    Test your understanding of front-end and back-end ratios. This quiz covers the calculations and importance of these financial metrics in evaluating housing affordability and total debt management. Learn how to compute these ratios effectively using given scenarios.

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