In lending, which 'C' concerns the borrower's ability to pay by examining debt ratios such as Gross Debt Service Ratio and Total Debt Service Ratio?

In lending, which 'C' concerns the borrower's ability to pay by examining debt ratios such as Gross Debt Service Ratio and Total Debt Service Ratio?

• A. Capacity
• B. Character
• C. Collateral
• D. Credit

Answer: (A)

This question tests the borrower's ability to pay, which is captured by the capacity factor. Lenders assess capacity by looking at debt service ratios, especially the Gross Debt Service Ratio (GDSR) and the Total Debt Service Ratio (TDSR). GDSR measures housing-related payments (principal, interest, property taxes, heating) as a portion of gross monthly income, while TDSR includes all regular debt payments in addition to housing costs. These ratios show how much of the borrower’s income is already tied up in debt, helping determine if there’s enough income left to comfortably service the loan. The other Cs focus on different aspects: Character is about the borrower's reliability and history of repaying debts; Collateral is the asset backing the loan; Capital relates to the borrower's net worth or down payment; and Conditions cover external factors like loan purpose and market conditions.

This question tests the borrower's ability to pay, which is captured by the capacity factor. Lenders assess capacity by looking at debt service ratios, especially the Gross Debt Service Ratio (GDSR) and the Total Debt Service Ratio (TDSR). GDSR measures housing-related payments (principal, interest, property taxes, heating) as a portion of gross monthly income, while TDSR includes all regular debt payments in addition to housing costs. These ratios show how much of the borrower’s income is already tied up in debt, helping determine if there’s enough income left to comfortably service the loan. The other Cs focus on different aspects: Character is about the borrower's reliability and history of repaying debts; Collateral is the asset backing the loan; Capital relates to the borrower's net worth or down payment; and Conditions cover external factors like loan purpose and market conditions.