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Case Study #1

Data

Bill and Brenda make $60,000 per year. They decided that they have outgrown their small house, and found the house they wanted for $225,000. They have agreed to a thirty-year loan, and estimate property taxes and insurance costs will be $200 per month, and estimate they can get a fixed-rate mortgage loan for 6.5 percent. They have a car loan of $270 per month and student loan of $50 per month.

Calculations

Calculate Bill and Brenda’s front-end ratio and back-end ratio (28% and 36%, respectively).

Application

What is the amount that most banks will lend them (remember that most banks will lend to the lower of the two ratios).

 



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