Using the 28/36 ratio, determine the maximum allowable recurring debt for someone with an annual income of $86,250.
To determine the maximum allowable recurring debt based on the 28/36 rule, we first need to identify the client's monthly income. Given an annual income of \(\$86,250\), we calculate the monthly income by dividing by 12:
\[ \text{Monthly Income} = \frac{\$86,250}{12} = \$7,187.50 \]
The 28/36 rule is a standard guideline used by lenders to assess a borrower's ability to take on debt. The rule states that a person's total monthly housing costs should not exceed 28% of their gross monthly income, and their total debt obligations (housing plus other recurring debts) should not exceed 36% of their gross monthly income. Therefore, the portion of monthly income available for recurring debt (non-housing debt) is the difference between the 36% limit and the 28% limit:
\[ \text{Recurring Debt Percentage} = 36\% - 28\% = 8\% \]
Now, we apply this percentage to the monthly income to find the maximum allowable recurring debt:
\[ \text{Maximum Recurring Debt} = \$7,187.50 \times 8\% \]
\[ \text{Maximum Recurring Debt} = \$7,187.50 \times 0.08 = \$575.00 \]
Comparing our calculated value of \(\$575.00\) with the provided choices:
The calculated maximum allowable recurring debt is \(\$575.00\), which corresponds to choice a. Therefore, the final answer is \(\boxed{\$575.00}\).
The 28/36 rule is commonly used by mortgage lenders to evaluate loan applications. For instance, if you are looking to buy a home, understanding this rule helps you manage your finances to ensure you can comfortably afford both your mortgage payment and other monthly obligations like car loans or credit card payments. By calculating your maximum allowable debt, you can better plan your budget before applying for a loan, improving your chances of mortgage approval.