Module 2 (2) The Analysis

Question 1

How should consumer credit generally be used?

Answer 1

for convenience only (i.e., to consolidate bills into one payment and to delay payment for an item until the billing date)

Question 2

What are the debt management rules of thumb for CONSUMER DEBT?

Answer 2

20% or less of NET monthly income

Question 3

What are the debt management rules of thumb for HOUSING COSTS?

Answer 3

28% or less of GROSS monthly income

Question 4

What are the debt management rules of thumb for TOTAL DEBT?

Answer 4

36% or less of GROSS monthly income

Question 5

Re: debt-to-income ratios

What percentage should be monthly housing costs?

Answer 5

including principal, interest, taxes, fees, and insurance monthly housing costs should be no more than 28% of the prospective borrower’s gross income

Question 6

Re: debt-to-income ratios

Total monthly payment on all debts should be no more than what?

Answer 6

36% of gross monthly income

Question 7

According to the underwriting for Fannie Mae, what is included in “total monthly payment on all debts”

Answer 7

monthly housing expenses (including taxes and interest)

Monthly required payments on installment/revolving credit monthly mortgage payments on non-income-producing property

monthly alimony, child support, or maintenance payments

Question 8

What is the front end ratio?

Answer 8

indicates the percentage of income that goes toward housing costs for homeowners that includes PITI (principal, interest, taxes, and insurance)

Question 9

If housing should not exceed 28% of gross monthly income, what does the gross income include?

Answer 9

dividends and interests EVEN IF THEY ARE BEING REINVESTED

Question 10

What is the back-end ratio?

Answer 10

identifies the percentage of income that goes toward paying all recurring debt payments, including those covered by the front-end ratio and other debts such as credit card payments, car loan payments, student loan payments, child support payments, alimony payments, and legal judgments

Question 11

In computing the back-end ratio what is it important to use? Current client payments or minimum payments?

Answer 11

the minimum required debt payment versus the amount the client is paying

(e.g., if the client is putting $500 toward the credit card debt the but minimum payment is $150, the $150 should be counted toward the debt)

Question 12

For this course, what is the maximum measure for back-end ratio for all debt?

Answer 12

36%

Question 13

What is the nonmortgage debt-to-income ratio?

Answer 13

this ratio compares the annual payments to service debt

Question 14

What debt does the nonmortage debt-to-income ratio exclude? Does it use net income or gross income?

Answer 14

the mortgage and uses a person’s annual take-home pay or (net income)

Question 15

What is the equation for non mortgage debt-to-income ratio?

Answer 15

Non mortgage Debt to income ratio=

Annual nonmortgage debt repayment
Divided by
Annual net income

Question 16

For mortgage lending purposes, the debt-to-income calculation is always based on what?

Answer 16

gross income

Question 17

What does the net-investment-assets-to-net-worth ratio compare?

Answer 17

the value of investment assets (excluding equity in a home) with net worth

Question 18

What should an individuals ratio be for net-investment-assts to net worth ratio?

Answer 18

they should have a ratio of at least 50% and the percentage should get higher as retirement approaches

Question 19

What is the net investment assets to net worth ratio equation?

Answer 19

net investment assets to net worth ratio =

net investments assets (excluding primary residence equity)
__________________
net worth

Question 20

What is the “current ratio”?

Answer 20

the ratio of current assets of a business (cash/cash equivalents, receivables, and inventory) to current liabilities (liabilities that are due within a year).

Question 21

What amount should you have in an emergency fund?

Answer 21

between 3-6 months of expenses