New York Real Estate Salesperson ExaminationReal Estate CalculationsHard
A prospective buyer has a gross monthly income of $7,500. Their current monthly debts include a car payment of $400 and a student loan payment of $250. The lender's debt-to-income (DTI) ratio limit is 43%. What is the maximum allowable total monthly housing expense (PITI) the buyer can have to qualify for the loan?
- A$3,225
- B$2,375
- C$2,575
- D$2,975
Show answer & explanationAnswer & explanation
Correct answer: B. $2,375
First, calculate the total monthly debt: $400 (car) + $250 (student loan) = $650. Next, calculate the maximum total monthly debt allowed by the DTI ratio: $7,500 (gross income) * 0.43 = $3,225. Finally, subtract the existing monthly debts from the maximum allowed to find the maximum housing expense: $3,225 - $650 = $2,575.
Why the other options are wrong
- A. This is the maximum total debt allowed, not the housing expense.
- C. This calculates the maximum DTI without subtracting existing debts.
- D. This is a common miscalculation of existing debts or DTI.
Debt-to-Income (DTI) Ratio
A financial measure that compares a borrower's total monthly debt payments to their gross monthly income, used by lenders to assess loan repayment ability.
- Calculated as (Total Monthly Debts / Gross Monthly Income) * 100%.
- Includes housing expenses (PITI) and other recurring debts.
- Lenders typically have front-end (housing only) and back-end (total debt) DTI limits.
Memory trick: Gross income times DTI limit, then subtract existing debts, a perfect fit.