Jermaine and LaBrea Magoro have found their dream home for $405,000. They can only put a 15% down payment to purchase the home, so they need to qualify for a mortgage loan of $344,... Jermaine and LaBrea Magoro have found their dream home for $405,000. They can only put a 15% down payment to purchase the home, so they need to qualify for a mortgage loan of $344,250. A mortgage loan officer at their bank provided an estimate of their principal and interest, homeowners insurance, and real estate taxes to be $2,199.67. Since they are only putting 15% down, they will need to pay for private mortgage insurance, which costs $215.67. The loan officer has not checked on Magoro's front-end and back-end ratios to see if they can qualify for a loan of this size. Jermaine provided the loan officer with the following stable income and monthly payment information: Jermaine's monthly gross income $5,500, LaBrea's monthly gross income $3,500, Car payment #1 $200, Car payment #2 $150, Personal Loan $100, Revolving charge cards $125. Read more

Steps to Solve

1. Calculate Monthly Income

Determine Jermaine and LaBrea's total monthly income. If Jermaine earns $4,500 per month and LaBrea earns $3,500, the total monthly income will be: $$ \text{Total Monthly Income} = 4500 + 3500 = 8000 $$

2. Identify Monthly Housing Expenses

Next, find the estimated monthly housing expenses, which include mortgage, insurance, and taxes. Assume their total monthly housing expenses are $2,400.

3. Calculate Front-End Ratio

The front-end ratio, which indicates what portion of their income goes towards housing expenses, is calculated as: $$ \text{Front-End Ratio} = \frac{\text{Housing Expenses}}{\text{Total Monthly Income}} $$ Substituting in the values: $$ \text{Front-End Ratio} = \frac{2400}{8000} = 0.3 $$ To express this as a percentage, multiply by 100: $$ 0.3 \times 100 = 30% $$

4. Identify Monthly Debts

Now, assess other monthly debts, which may include student loans, car payments, and credit cards. Let's assume their total monthly debts are $1,600.

5. Calculate Back-End Ratio

The back-end ratio considers all debt payments against total income: $$ \text{Back-End Ratio} = \frac{\text{Total Monthly Debts}}{\text{Total Monthly Income}} $$ Substituting the numbers: $$ \text{Back-End Ratio} = \frac{1600}{8000} = 0.2 $$ Again, convert into a percentage: $$ 0.2 \times 100 = 20% $$

6. Interpret the Ratios

Lenders typically look for a front-end ratio below 28-30% and a back-end ratio below 36-43%. Since Jermaine and LaBrea have a front-end ratio of 30% and a back-end ratio of 20%, they qualify based on standard guidelines.