1. David and Jennifer Lee want to buy a house for $650,000 in 4 years. They want to put 20% down and apply for 30-year fixed mortgage to finance the rest. Mortgage interest rate is 4%, annual property tax is 1.1% of house value and homeowners insurance is $150 per month. Assume expected rate of return on their savings is 2%. Expected inflation rate is 3%.

a. Calculate housing expenses (front-end) ratio.

b. Calculate total debt-to-income (back-end) ratio.

c. Based on your calculation, can they afford the $650,000 house?