### Helping Jamie and Jack buy their dream home in Los Angeles

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:

- Combined Monthly Income
- Maximum Housing Payment (Front-End Ratio)
- Maximum Housing Payment After Debts (Back-End Ratio)
- Estimated Loan Amount

Using Jamie and Jack’s combined income, savings, and debts, calculate how much house they can afford. Consider all factors such as debt-to-income ratios, mortgage options, and budgeting to help them determine a realistic home-buying budget.

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)

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