Question

Bob is a 28-year-old, unmarried man and the assistant manager of a grocery store. He jokes about working at the grocery store just to get his employee discount because his Great Dane eats about $50 worth of dog food a week! For the past five years, he's also been a volunteer firefighter, drawing on his Navy training. Bob is really proud of his condo, and is happy he'll have his big screen TV paid off in a couple months because he wants to buy a new laptop computer.  

Bob has the following monthly income and total expenses:

Gross monthly income: $5,300
Monthly principal and interest (including any PMI): $1,270
Monthly homeowners association fee: $100
Annual property taxes: $3,278
Annual homeowners insurance: $650
Monthly auto payment: $295
Semi-annual auto insurance: $700
Average monthly gasoline expense: $200
Monthly installment payment on the TV: $97
Average monthly utilities: $250
Monthly Internet/phone/cable TV: $200
Bruno's dog food and tennis balls: $250

Long Answer

Assignment Questions: (answer in your own words, do not cut & paste!)
1. What is Bob's housing (front-end) ratio? Show in detail how you calculated this.
2. What is his debt-to-income (back-end) ratio? Show in detail how you calculated this.
Without considering any compensating factors...
3. What is the maximum allowable housing ratio for a conforming loan?
4. What is the maximum allowable debt-to-income ratio for a conforming loan?
5. What is the maximum allowable housing ratio for an FHA loan?
6. What is the maximum allowable debt-to-income ratio for an FHA loan?
7. What is the maximum allowable debt-to-income ratio for a VA loan?
8. Which, if any, of these three types of loans does Bob qualify for?

Answer 1

1) housing (front-end) ratio = total monthly housing cost divided by gross monthly income

housing (front-end) ratio = ( $1,270 + $100 + $3,278 + $650 ) $5,300

housing (front-end) ratio = $ 5298 $5,300

housing (front-end) ratio = 0.9996

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2) debt-to-income (back-end) ratio = ( monthly housing cost + debts ) gross monthly income

debt-to-income (back-end) ratio = ( $1,270 + $100 + $3,278 + $650 + $ 295 + $ 97 ) $5,300

debt-to-income (back-end) ratio = 1.07358

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3) Maximum allowable housing ratio for a conforming loan being around 30% / 40%

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4) Maximum allowable total debt-to-income ratio for a conforming loan would be 41 percent.