Estimate the affordable monthly mortgage payment, the affordable mortgage amount, and the affordable home purchase price for the following situation (see Exhibit 7–6).

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Step 1: Determine your monthly gross income (annual income divided by 12). Step 2: With a down payment of at least 5 percent, lenders use 33 percent of monthly gross income as a guideline for PITI (principal, interest, taxes, and insurance) and 38 percent of monthly gross income as a guideline for PITI plus other debt payments. Step 3: Subtract other debt payments (e.g., payments on an auto loan) and an estimate of the monthly costs of property taxes and homeowner's insurance. (a) Affordable monthly mortgage payment Step 4: Divide this amount by the monthly mortgage payment per $1,000 based on current mortgage rates-an 5 percent, 30-year loan, for example (see Exhibit 7-7)- and multiply by $1,000. (b) Affordable mortgage amount.. Step 5: Divide your affordable mortgage amount by 1 minus the fractional portion of your down payment (e.g., 1-0.1 with a 10 percent down payment). (c) Affordable home purchase price ..... Example A $48,000 + 12 $4,000 x 0.38 $ 1,520 -380 -300 840 + $ 5.37 x $ 1,000 $156,425 +0.9 $173,805 Example B $48,000 + 12 $ 4,000 x 0.33 $ 1,320 -300 $ 1,020 + $5.37 x $1,000 $189,944 +0.9 $211,049