Question

Jane's monthly gross income is $4,000 and her debt payments are $400 per month. Given GDS...

Jane's monthly gross income is $4,000 and her debt payments are $400 per month. Given GDS of 30 percent and TDS of 40 percent, she will be able to qualify for mortgage-related debt payments of __________ per month.

  1. $1,000
  2. $1,400
  3. $1,200
  4. $1,600

The answer is $1,200, but I would like to know the steps to get the answer.

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Answer #1

TDS = total debt service. It is the percentage of the borrower's income that is needed to cover all monthly debt payments, and all housing expenses

The debt payments of $400 are assumed to include all mortgage debt payments. Housing expenses are not given, and therefore assumed to be zero.

TDS = 40%. Maximum monthly payments = monthly gross income * 40% = $4000 * 40% = $1600

Current debt payments = $400

Maximum possible monthly payments to qualify for mortgage =   Maximum monthly payments - Current debt payments = $1600 - $400 = $1200

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