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 Housing Expense To find the front-end ratio, we need to calculate the monthly housing expense. This includes mortgage payment, property taxes, homeowners insurance, and any homeowner association fees.

Let's say Jermaine and LaBrea's estimated monthly housing payment (including all the above) is $X.

2. Determine Front-End Ratio The front-end ratio is calculated by dividing the monthly housing expense by their gross monthly income. The formula is as follows:

$$ \text{Front-End Ratio} = \frac{\text{Monthly Housing Expense}}{\text{Gross Monthly Income}} $$

Assuming their gross monthly income is $Y, then:

$$ \text{Front-End Ratio} = \frac{X}{Y} $$

3. Calculate Total Monthly Debt To find the back-end ratio, we'll also need to calculate their total monthly debt, which includes all recurring debt payments (like credit card payments, car loans, and student loans) in addition to the housing expense.

Let’s say their total monthly debt payments (including housing expense) is $Z.

4. Determine Back-End Ratio The back-end ratio is calculated by dividing the total monthly debt by their gross monthly income. The formula is:

$$ \text{Back-End Ratio} = \frac{\text{Total Monthly Debt}}{\text{Gross Monthly Income}} $$

In this case, it will be:

$$ \text{Back-End Ratio} = \frac{Z}{Y} $$

5. Compare Ratios to Standards Typically, lenders prefer a front-end ratio of no more than 28% and a back-end ratio of no more than 36%.

To check qualification:

• Front-End Ratio should be $\leq 0.28$
• Back-End Ratio should be $\leq 0.36$

6. Final Decision If both ratios fall within these ranges, Jermaine and LaBrea will qualify for the mortgage loan of $344,250; otherwise, they will not.