MEET Joe

Here is our EXAMPLE that we will use throughout this exercise:

HOUSING RATIO:

Joe earns $6,000 gross monthly income and he is looking at an FHA loan with a 31% Housing Ratio.

Joe’s formula for calculating his Housing Ratio will be: Note: when multiplying by a percentage, turn the percentage into decimal points (.31).

DEBT-TO-INCOME-RATIO:

In our example, Joe earns $6,000 gross monthly income and he is looking at an FHA loan with a 43% Debt to Income Ratio. Joe’s formula will be:

STEP 1: Note: when multiplying by a percentage, turn the percentage into decimal points (.43).

Now we need to subtract Joe’s monthly debt obligations from the $2,580. Here is how we do it:

STEP 2:

Example 1: Joe has $750 in monthly debt payments: ratio minus $750 total monthly debt equals

In this case, Joe could afford to pay $1,830 per month towards a mortgage payment

Example 2: Joe has $200 in monthly debt payments:

In this case, it would appear that Joe can afford to pay $2,380 per month towards a mortgage payment, though because this Debt-to-Income Ratio exceeds his Housing Ratio, he likely would default back to the original Housing Ratio of $1,860.

Now that we know Joe’s maximum monthly mortgage payment, let’s determine Joe’s maximum total loan amount. We will use $1,860 as Joe’s maximum monthly mortgage payment through the rest of this exercise.

To continue, we need to work with the P&I (Principle and Interest) part of Joe’s payment, which is approximately 80% of the maximum monthly mortgage payment. We will calculate 80% of Joe’s maximum monthly mortgage payment, which is $1,860:

Now we will use the Sample Factor Table to calculate the total overall mortgage from the P&I.

Now we multiply by 1000 to move the decimal place three spaces:

$241,558 is the maximum mortgage amount based on a P&I payment of $1,488 per month for a term of 30 years at 6.25% interest.