9-2Mortgage Affordability.Seth and Alexandra Moore of Elk Grove Village, Illinois have an annual income of $110,000 and want to buy a home. Currently, mortgage rates are 5%. The Moores want to take out a mortgage for 30 years. Real estate taxes are estimated to be $4,800 per year for homes similar to what they would like to buy, and homeowner's insurance would be about $1,500 per year.

1. Using a 28% front-end ratio, what are the total annual and monthly expenditures for which they would qualify?
2. Using a 36% back-end ratio, what monthly mortgage payment (including taxes & insurance) could they afford given that they have an automobile loan payment of $470, a student loan payment of $350, and credit card payments of $250? (Hint: Subtract these amounts from the total monthly affordable payments for their income to determine the amount left over to spend on a mortgage.)
3. Using a 36% back-end ratio, if the Moores had zero debt, what monthly mortgage payment (including taxes and insurance) could they afford?

9-2.

1. a. Using the front-end ratio of 28%, 110,000 0.28 = $30,800 annually = $2567 monthly
2. b. Using the maximum 36% back-end ratio, they could afford monthly mortgage payments of $2230 [($110,000 0.36/12) - $470 - $350 - $250].

c.Using the maximum 36% back-end ratio, they could afford monthly mortgage payments of $3300 ($110,000 0.36/12).

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