Humber/Ontario Real Estate Course 4 Exam Practice

How does the calculation of the GDS ratio differ from the TDS ratio?

1. The TDS ratio does not include all personal debts.

2. The GDS ratio excludes credit card debt.

3. Personal debts are factored into the TDS ratio.

4. The GDS ratio is always higher than the TDS ratio.

5. Both ratios exclude mortgage insurance premiums.

6. The TDS ratio only includes mortgage payments and property taxes.

The correct answer is: Personal debts are factored into the TDS ratio.

The correct understanding is that the GDS (Gross Debt Service) ratio and TDS (Total Debt Service) ratio are both used to gauge a borrower's ability to repay mortgage and associated debts. The defining feature of the TDS ratio is indeed its consideration of all personal debts, including credit card payments, car loans, and other debts. This comprehensive approach provides lenders with a holistic view of the borrower’s financial obligations, allowing them to assess risk more effectively. The GDS ratio, on the other hand, is focused primarily on housing-related expenses – including the mortgage payment, property taxes, and heating costs – in relation to the borrower's gross income. It does not account for personal debts like credit card obligations. By differentiating the focus of these two ratios, lenders can better evaluate a buyer’s financial health and capacity to manage additional debt. This distinction underscores the importance of understanding both ratios' calculations and their implications for mortgage lending.