Suppose you take out a 20-year mortgage for a house that costs $457636. Assume t

Question

Suppose you take out a 20-year mortgage for a house that costs $457636. Assume the following:

The annual interest rate on the mortgage is 5%.

The bank requires a minimum down payment of 12% at the time of the loan.

The annual property tax is 1.9% of the cost of the house.

The annual homeowner's insurance is 0.6% of the cost of the house.

The monthly PMI is $88

Your other long-term debts require payments of $520 per month.

If you make the minimum down payment, what is the minimum gross monthly salary you must earn in order to satisfy the 28% rule and the 36% rule simultaneously?

Explanation / Answer

Solution :

For qualifying in 28% Slab the following housing expenses are counted.

Interest @ 5% = $22882

Down payment @ 12% = $ 54916

Annual property tax @ 1.9 % =$ 8695

Annual home owners insurance @ 0.6 =$ 2746

This expenses are carried once in a year and not every month for the whole year hence they are ccalculated as housing expense for 28 rule. It is also known as front-end ratio.

percentages are calculated on amount of mortgage loan of $ 457636, for e.g. 5% of $457636 = $ 22882 and so on.

therefore total of housing expenses is = $ 89239

This expenses are annual and we need to convert them to month basis, so $ 89239/12 = $7437

So to satisfy 28% rule the person will need ( $ 7437/ 28 %) = $ 26561 of gross monthly salary.

For qualifying in 36% rule which is also known as back-end ratio , housing expenses plus monthly payment towards debt are counted. Monthly payments are only included in the back-end ratio when they are expected to be paid for the next 10 months or more.

therefore PMI expenses of $ 88 & monthly debt payment of $520 = $608 + $ 7437 housing expenses totally added to = $ 8045 back-end total monthly debt.

So for satisfying 36% rule the person needs $ 8045/ 36% = $ 22347 of gross monthly income.

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