Calculate the housing expense ratio for the Conventional loan option. Calculate the total expense ratio for the Conventional loan option. Do the ratios fall within acceptable Conve... Calculate the housing expense ratio for the Conventional loan option. Calculate the total expense ratio for the Conventional loan option. Do the ratios fall within acceptable Conventional conforming loan underwriting guidelines?
Understand the Problem
The question is asking us to calculate financial ratios related to housing expenses for two loan options, specifically a Conventional loan and an FHA loan. We need to perform calculations for the housing expense ratio and total expense ratio for the Conventional loan option, and determine whether these ratios are within acceptable underwriting guidelines for a conforming loan.
Answer
To find the HER, calculate $ HER = \frac{\text{Monthly Housing Expenses}}{\text{Gross Monthly Income}} $; for TER, use $ TER = \frac{\text{Total Monthly Expenses}}{\text{Gross Monthly Income}} $. Check if $ HER \leq 0.28 $ and $ TER \leq 0.36 $.
Answer for screen readers
The answer will depend on the specific values for Monthly Housing Expenses, Total Monthly Expenses, and Gross Monthly Income provided in the initial information.
Steps to Solve
- Determine the Housing Expense Ratio (HER)
To find the Housing Expense Ratio, you use the formula:
$$ HER = \frac{\text{Monthly Housing Expenses}}{\text{Gross Monthly Income}} $$
Assuming Monthly Housing Expenses are given, plug in the Monthly Housing Expenses and Gross Monthly Income values into this formula.
- Calculate the Total Expense Ratio (TER)
Next, calculate the Total Expense Ratio using the formula:
$$ TER = \frac{\text{Total Monthly Expenses}}{\text{Gross Monthly Income}} $$
You'll need to know Total Monthly Expenses which includes housing expenses plus other monthly obligations like debt payments.
- Check Against Guidelines
Conventional loans typically require that the HER be no more than 28% and the TER be no more than 36%.
- Check if:
$ HER \leq 0.28 $
$ TER \leq 0.36 $
If both conditions are satisfied, then the loan options are within acceptable guidelines.
The answer will depend on the specific values for Monthly Housing Expenses, Total Monthly Expenses, and Gross Monthly Income provided in the initial information.
More Information
The Housing Expense Ratio and Total Expense Ratio are critical metrics that help lenders assess a borrower’s ability to repay their mortgage. A lower ratio indicates a lower risk for lenders.
Tips
- Using incorrect values for monthly income or expenses.
- Not converting percentages properly when checking against guidelines (e.g., using 28 instead of 0.28).
- Forgetting to include all monthly obligations when calculating the Total Monthly Expenses.
