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?

Q: What is the correct answer to: 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?

The correct answer is $2,133. 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.

Q: What background knowledge is needed for this Mortgage & Real Estate Finance question?

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.

Q: What is a good way to remember the answer to this Mortgage & Real Estate Finance question?

Remember '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.

Q: What exam tip applies to this Mortgage & Real Estate Finance question?

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.

Q: How does this Mortgage & Real Estate Finance concept apply in real world practice?

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.

Question

Mortgage & Real Estate FinanceQualification RatiosMEDIUM

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?

Answer Options

A

$1,733

B

$2,133

C

$2,533

D

$2,933