A borrower grossing $8,000 a month has a $2,240 housing payment and $960 in other monthly debt. What are the borrower's front-end housing ratio and back-end total debt-to-income ratio?
Correct Answer
D) A 28% housing ratio and a 40% total debt ratio on those figures
The housing ratio divides the housing payment by gross income, $2,240 over $8,000 or 28%, and the total debt ratio divides housing plus all other monthly obligations, $3,200 over $8,000 or 40%. Other choices: a 12% figure is the other debt alone rather than a ratio anyone computes; reversing the two puts the larger number on housing, which cannot be, since housing is inside the total; and pairing 12% with 40% makes the same mistake from the other end. Source: Front-end and back-end qualifying ratios
Why This Is the Correct Answer
The housing ratio divides the housing payment by gross income, $2,240 over $8,000 or 28%, and the total debt ratio divides housing plus all other monthly obligations, $3,200 over $8,000 or 40%. Other choices: a 12% figure is the other debt alone rather than a ratio anyone computes; reversing the two puts the larger number on housing, which cannot be, since housing is inside the total; and pairing 12% with 40% makes the same mistake from the other end. Source: Front-end and back-end qualifying ratios
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