Question

A client, Jan, age 35, came into your office today. She provides the you with the following information for the upcoming year:

- Income = $100,000

- Principal and interest payments on home mortgage = $22,000

- Homeowners Insurance = $1,500

- Property Taxes = $7,000

- Living expenses = $30,000

- Credit card debt payments = $10,000

- Savings = $5000

- Student Loan Payments = $4,000

- Car Payment = $4,000

When considering the targeted benchmarks, which of the following statements should you make during the next meeting?

A) Both the basic and broad housing ratio are within the normal range.

B) Both the basic and broad housing ratio are outside the normal range.

C) The basic housing ratio is within the normal range, but the broad housing ratio is not.

D)The broad housing ratio is within the normal range, but the basic housing ratio is not.

Answer 1

Income = $100,000

Housing costs = principal and interest payments on mortgage + homeowners insurance + property taxes

= 22000+1500+7000

= $30,500

Housing costs as a % of gross income = 30,500/100,000 = 30.50%

The standard housing costs<=28% of income.

Here it is 30.50% So basic housing ratio is not within the normal range.

Broad housing ratio = (housing costs+credit card payments + student loan payments+car payment)/100,000

= (30500+10000+4000+4000)/100000

= $48,500/100,000

= 48.50%

The standard housing costs+debt payments<=38%.

Here it is 48.50% and hence broad housing ratio is not within the normal range.

so the answer is B)Both the basic and broad housing ratio are outside the normal range.