Sarah earns $80,000 annually and has monthly debt payments of $500. Using the Total Debt Service (TDS) ratio limit of 44%, what is the maximum monthly housing payment she can qualify for?

Q: What is the correct answer to: Sarah earns $80,000 annually and has monthly debt payments of $500. Using the Total Debt Service (TDS) ratio limit of 44%, what is the maximum monthly housing payment she can qualify for?

The correct answer is $2,933. Option B ($2,933) is correct because it represents the maximum total monthly debt service Sarah can qualify for under the 44% TDS ratio. The calculation is: $80,000 ÷ 12 months = $6,667 gross monthly income. Then $6,667 × 0.44 = $2,933 maximum total debt service. This figure includes all debt obligations - both existing debt payments and proposed housing costs combined. The TDS ratio measures total debt capacity, not additional housing payment capacity beyond existing obligations.

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

The Total Debt Service (TDS) ratio is a key mortgage qualification metric in Canada, typically capped at 42-44% by most lenders. It includes all monthly debt obligations: proposed housing costs (mortgage payments, property taxes, heating, 50% of condo fees), plus existing debt payments (credit cards, loans, etc.). This differs from the Gross Debt Service (GDS) ratio, which only considers housing-related expenses and is typically limited to 32-39%. These ratios are enforced through OSFI guidelines for federally regulated lenders and adopted by provincial lenders. Understanding both ratios is essential for real estate professionals to properly advise clients on affordability and qualification requirements.

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

Think of TDS as a 'Total Debt Sandwich' where you stack ALL monthly debt payments (existing debt + proposed housing) between two slices of bread representing the 44% limit. The sandwich can't exceed the plate size (gross monthly income × 0.44). You don't subtract ingredients - you measure the whole sandwich. When you see TDS questions, visualize the sandwich. Calculate gross monthly income × TDS percentage to get the 'plate size' - this is your answer. Don't subtract existing debt from this amount; the TDS represents the total allowable debt 'sandwich size.'

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

For TDS calculations: Convert annual income to monthly, multiply by the TDS percentage (usually 44%). This gives you maximum total debt service - don't subtract existing debt. The TDS is the ceiling, not additional capacity.

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

A real estate agent is working with clients Sarah and Tom who want to buy their first home. Sarah earns $80,000 annually with $500 monthly debt payments. The agent calculates her TDS capacity at $2,933 monthly total debt service. This means Sarah can afford housing costs up to $2,433 monthly ($2,933 - $500 existing debt). Understanding this helps the agent set realistic price ranges and prevents showing properties that would result in mortgage rejection, saving time and managing client expectations effectively.

Question

Mortgage & Real Estate FinanceQualification RatiosMEDIUM

Sarah earns $80,000 annually and has monthly debt payments of $500. Using the Total Debt Service (TDS) ratio limit of 44%, what is the maximum monthly housing payment she can qualify for?

Answer Options

A

$2,433

B

$2,933

C

$3,433

D

$3,933