Question of the Month (August 2020): Mortgage Ratios

Posted by Jerry Mee, CFP®

Aug 1, 2020

This question was discussed in detail during the August 2020 episode of the BIF Bites podcast!


The independent rule of thumb for PITI indicates that it should generally not exceed:

  1. 20% of net income.
  2. 28% of net income.
  3. 28% of gross income.
  4. 36% of gross income.

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Correct answer: C. 28% of gross income.

Instructor insight:

Use the following table to guide your memorization of the three key mortgage-related ratios:

  Limit Numerator Denominator
Housing Cost
≤28%
PITI
Gross Income
Consumer Debt
≤20%
Non-housing consumer debt
Net Income
Total Debt
≤36%
Non-housing consumer debt + PITI
Gross Income

CFP® Exam tip:

On your CFP® exam, be prepared to use information within a question or a cash flow statement/statement of financial position to calculate the key lending ratios, the consumer debt ratio, and ANY of the following:

1. Monthly Mortgage Payment (TVM)
2. Remaining Balance
3. Total Interest Paid*
4. Total Principal Paid*
5. Refinance

 

Topics: Practice Questions