Final answer:
The bank calculates house payments based on gross income, but it's more realistic to use net income to determine affordability. A student's $35,000 gross income results in $10,150 allowable for mortgage payments annually by the bank's estimate. However, 29% of the student's net income, which is more relevant for budgeting, would be $7,105, which is a more practical figure considering other household expenses.
Step-by-step explanation:
From the information provided, a student's gross annual income is $35,000, and their net annual income is 70% of the gross. This calculates to $35,000 * 0.70 = $24,500 net income. The bank allows a maximum of 29% of the gross income for house payments, equating to $35,000 * 0.29 = $10,150 per year for mortgage payments.Considering that the net income is the actual amount the student takes home after taxes and other deductions, the realistic amount for house payments should be calculated based on the net income rather than the gross income. If we calculate 29% of the net income for house payments, it would be $24,500 * 0.29 = $7,105 per year, which seems more realistic and affordable for the student's budget.It's important to factor in additional costs such as maintenance, insurance, and potential interest rates on the mortgage when determining the overall affordability.In conclusion, while the bank uses gross income to determine eligibility for a mortgage, it is more practical for individuals to consider their net income when assessing their ability to afford a home.