Question #3 – Credit and Debt

Tom has rented an apartment for close to 5 years and now wants to buy a condo on his own. He is 30 years old and makes an annual gross income of $72,000 which is approximately $54,000 after tax. He has the following expenses at the present time:
  • $1,200 rent
  • $400 car payment
  • $150 car insurance
  • $200 in other debt repayments
Tom expects that once he moves into his new home (in a better neighborhood) his car insurance will decline by $50 per month and he will begin paying close to $100 per month in heating costs, $400 per month in condo fees, and $150 per month in property taxes.
When talking to a mortgage expert, Tom becomes aware of the 32% and 40% thresholds for debt service ratios. He wants to know how much of a monthly mortgage payment he will be able to afford. According to the gross debt service (GDS) ratio what is the maximum monthly mortgage payment that Tom can afford?
  1. $990
  2. $1,350
  3. $1,470
  4. $1,950

Solution:

As the GDS does not include other debt repayments, the maximum that the mortgage payment, property taxes, heat, and 50% of condo fees can equate to is 32% of gross monthly income. 32% of (72,000/12) is $1,920.
As his expenses are expected to total: 100 + 150 + 0.5 (400) = 450, Tom is able to afford a monthly mortgage payment of 1,920 – 450 = 1,470. The correct answer is c.