Debt Service Ratios: Study Tip
Don’t get tripped up on debt service ratio calculations:
- Watch for different payments. One multiple choice question may focus on principal and interest (PI), while another asks about principal, interest and taxes (PIT). In yet another, it may be a condominium with a portion of heating costs included (PITH).
- Be careful with time periods. MCQs can contain different time periods; e.g., annual income amount and monthly taxes, or a monthly payment that asks for an annual income requirement. Make certain that you convert from one to the other as needed.
- Some questions may reverse the usual calculation steps. For example, the GDS or TDS is given in the MCQ and then you must work backward to the minimum income to meet that lender’s requirement.
- Extraneous information may be included. For example, mortgage terms may be detailed, when such details are not needed to arrive at the correct answer. The exam creator is assessing if you can sort out the pertinent details from other immaterial ones.