A client earns $80,000 annually and has monthly debt payments of $800. Using a 32% Gross Debt Service ratio, what is the maximum monthly housing payment they can qualify for?
Correct Answer
B) $2,133
The GDS ratio allows housing costs up to 32% of gross income. Monthly gross income is $80,000/12 = $6,667. Maximum housing payment is $6,667 × 0.32 = $2,133.
Why This Is the Correct Answer
Option B ($2,133) correctly applies the 32% GDS ratio calculation. The client's annual income of $80,000 divided by 12 months equals $6,667 monthly gross income. Multiplying this by the 32% GDS ratio ($6,667 × 0.32) yields $2,133.44, which rounds to $2,133. This represents the maximum monthly housing payment (including principal, interest, taxes, and heating) the client can qualify for under standard lending guidelines, regardless of their existing debt obligations.
Why the Other Options Are Wrong
Option A: $1,733
Option A ($1,733) represents approximately 26% of gross monthly income, which is below the standard 32% GDS ratio threshold. This would unnecessarily restrict the client's purchasing power and doesn't utilize their full qualifying capacity under conventional lending standards.
Option C: $2,533
Option C ($2,533) represents approximately 38% of gross monthly income, which exceeds the standard 32% GDS ratio limit. This would not qualify under conventional mortgage guidelines and could lead to loan rejection or require alternative lending products with higher rates.
Option D: $2,933
Option D ($2,933) represents approximately 44% of gross monthly income, which significantly exceeds the 32% GDS ratio threshold. This level would be unacceptable to most conventional lenders and could indicate financial overextension for the borrower.
Deep Analysis of This Mortgage & Real Estate Finance Question
This question tests understanding of Gross Debt Service (GDS) ratio calculations, a fundamental mortgage qualification metric used by Canadian lenders. The GDS ratio measures housing costs as a percentage of gross monthly income, with the standard maximum being 32% for conventional mortgages. This calculation is critical in real estate practice as it determines a client's purchasing power and helps agents guide buyers toward appropriate price ranges. The question isolates the GDS calculation by focusing solely on housing payment capacity, separate from existing debt obligations (which would be considered in Total Debt Service ratio). Understanding these ratios is essential for real estate professionals to properly qualify clients, set realistic expectations, and avoid wasting time showing properties outside their financial reach. This knowledge directly impacts transaction success rates and client satisfaction.
Background Knowledge for Mortgage & Real Estate Finance
The Gross Debt Service (GDS) ratio is a key mortgage qualification metric mandated by federal banking regulations and used by all Canadian lenders. It calculates housing costs (principal, interest, taxes, heating - PITH) as a percentage of gross monthly income. The standard maximum is 32% for conventional mortgages, though some programs allow up to 35-39%. This differs from Total Debt Service (TDS) ratio, which includes all debt payments and typically maxes at 40-44%. These ratios are enforced under federal banking guidelines and provincial mortgage regulations, ensuring borrowers don't overextend financially. Real estate professionals must understand these calculations to properly qualify clients and provide accurate purchase price guidance.
Memory Technique
The 32% GDS House RuleRemember 'GDS = Gross Divided by Seasons' - take gross monthly income and multiply by 32% (think of 32 degrees, the freezing point where water becomes ice, representing the 'freeze point' for housing affordability). Visualize a house thermometer showing 32 degrees as the maximum safe temperature for housing costs.
When you see GDS ratio questions, immediately think of the thermometer at 32 degrees. Calculate monthly gross income first, then multiply by 0.32. This visual reminder helps you avoid confusing GDS with TDS ratios or using incorrect percentages.
Exam Tip for Mortgage & Real Estate Finance
Always convert annual income to monthly first ($80,000 ÷ 12 = $6,667), then multiply by 0.32. Double-check your math by ensuring the result makes sense as roughly one-third of monthly income.
Real World Application in Mortgage & Real Estate Finance
A real estate agent meets with first-time buyers earning $80,000 annually. Before showing properties, the agent calculates their GDS capacity at $2,133 monthly for housing costs. With current interest rates, this translates to approximately a $400,000-450,000 purchase price range. The agent can now focus showings on appropriate properties, saving time and managing expectations. When the clients find a home requiring $2,400 monthly payments, the agent explains it exceeds their GDS ratio and could jeopardize mortgage approval, protecting them from potential disappointment and financial overextension.
Common Mistakes to Avoid on Mortgage & Real Estate Finance Questions
- •Forgetting to convert annual income to monthly before calculating
- •Confusing GDS (32%) with TDS (40-44%) ratios
- •Including existing debt payments in GDS calculation instead of housing costs only
Key Terms
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