Follow the steps below to calculate Jamie and Jack’s housing affordability.
Note: The following examples use sample figures. Be sure to use Jamie and Jack’s actual income and debt figures provided in the scenario above for your own calculations.

Step 1: Calculate Combined Monthly Income

Formula:
Example: If one person earns $55,000/year and the other earns $65,000/year, their combined monthly income would be:
Now, use Jamie and Jack’s actual salaries from the scenario to calculate their combined monthly income.

Step 2: Calculate the Front-End Ratio (Max Housing Payment)

Formula:
The front-end ratio is a percentage that shows how much of their monthly income can be allocated toward housing expenses (mortgage, insurance, taxes).
Example: Using a combined monthly income of $10,000 and applying the front-end ratio (28%), the calculation would be:
Now, calculate Jamie and Jack’s max housing payment using their actual combined monthly income and the 28% ratio.

Step 3: Calculate the Back-End Ratio (Max Total Debt)

Formula:
The back-end ratio shows how much of their monthly income can be allocated toward total debts, including housing payments and other debts.
Example: If the combined monthly income is $10,000 and the back-end ratio is 36%, the calculation would be:
Subtract their existing monthly debts:
- $150/month car payment
- $100/month student loan
- $50/month student loan
  Example total monthly debt:
Subtract the total monthly debt from the Max Total Debt to determine how much they can spend on housing after accounting for other debts:
Now, use Jamie and Jack’s monthly debts and combined monthly income from the scenario to calculate the back-end ratio and determine how much they can spend on housing after debts.

Step 4: Estimate Loan Amount

Based on the remaining housing payment from the back-end ratio, you can estimate how much mortgage Jamie and Jack can afford.
Formula (approximate):
where
Example: If the remaining amount for housing is $3,300/month, and the interest rate is 6%, you can plug this into a loan calculator to estimate the loan amount.
Alternatively, use an online mortgage calculator to get an estimate for a 30-year loan at 6% interest based on Jamie and Jack’s remaining monthly housing payment.

Submission:

Submit your calculations for Steps 1-4 as a list of the following:

Steps:

Estimate Loan Amount and Total Home Price

Calculate Combined Monthly Income

Calculate Front-End Ratio (Max Housing Payment)

Calculate Back-End Ratio (Max Total Debt)

APA

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