A client has a gross monthly income of $8,000 and monthly debt payments of $800. What is their maximum allowable housing costs under the Gross Debt Service (GDS) ratio?

Q: What is the correct answer to: A client has a gross monthly income of $8,000 and monthly debt payments of $800. What is their maximum allowable housing costs under the Gross Debt Service (GDS) ratio?

The correct answer is $2,800. Option C ($2,800) correctly applies the standard GDS ratio calculation. The GDS ratio allows housing costs up to 35% of gross monthly income for conventional mortgages. With a gross monthly income of $8,000, the calculation is straightforward: $8,000 × 35% = $2,800. This represents the maximum allowable housing costs under standard lending guidelines, regardless of existing debt payments, as GDS specifically measures housing costs against gross income.

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

The Gross Debt Service (GDS) ratio is regulated under provincial mortgage broker legislation and follows guidelines established by financial institutions and CMHC. It calculates housing costs (PITHC - Principal, Interest, Taxes, Heating, Condo fees) as a percentage of gross monthly income. The standard threshold is 35% for conventional mortgages, though high-ratio insured mortgages may allow up to 39%. This differs from the Total Debt Service (TDS) ratio, which includes all debt payments and typically caps at 42-44%. These ratios ensure responsible lending practices and borrower protection.

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

Remember 'GDS = Gross × 35%' - think of it as the 'Golden Door to homeownership Stays at 35%'. The existing debt payments mentioned in the question are a red herring for GDS calculations, as GDS only considers housing costs against gross income, not existing debts. When you see GDS ratio questions, immediately identify the gross monthly income and multiply by 35%. Ignore any existing debt information as that's relevant for TDS calculations, not GDS. Focus solely on the housing cost threshold.

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

For GDS questions, multiply gross monthly income by 35% and ignore existing debt payments. GDS only measures housing costs against income, while TDS includes all debts. Don't get distracted by debt information when calculating GDS ratios.

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

A real estate agent is working with first-time buyers earning $8,000 monthly with $800 in car payments. During pre-qualification, the agent explains that regardless of their car payments, they can afford up to $2,800 monthly for housing costs under GDS guidelines. This helps set realistic expectations for their property search and prevents them from looking at homes requiring higher monthly payments that wouldn't qualify for financing.

Question

Mortgage & Real Estate FinanceQualification RatiosMEDIUM

A client has a gross monthly income of $8,000 and monthly debt payments of $800. What is their maximum allowable housing costs under the Gross Debt Service (GDS) ratio?

Answer Options

A

$2,240

B

$2,400

C

$2,800

D

$3,200