Housing Counselor Certification (HUD) Practice Exam

Which factor is most commonly evaluated in determining a borrower's ability to repay a mortgage?

1. Current savings

2. Debt-to-income ratio

3. Length of residence

4. Occupational status

The correct answer is: Debt-to-income ratio

The debt-to-income ratio is a critical factor in evaluating a borrower's ability to repay a mortgage. This ratio compares a borrower's total monthly debt payments to their gross monthly income, providing insight into how much of their income is allocated toward debt obligations. A lower debt-to-income ratio indicates that a borrower has a manageable level of debt relative to their earnings, which suggests a higher capacity to make mortgage payments reliably. Lenders generally prefer borrowers with a lower debt-to-income ratio, as it signifies financial stability and a greater likelihood of meeting repayment requirements. This metric is favored over other factors because it offers a clear, quantifiable measure of a borrower's ability to manage monthly expenses alongside a new mortgage payment. While current savings, length of residence, and occupational status can also play roles in a borrower's financial profile, they do not provide as direct or reliable an assessment of repayment capacity as the debt-to-income ratio does. Current savings may indicate available funds for a down payment or reserves but do not reflect ongoing financial obligations. Length of residence could imply stability but does not directly correlate with income or debt levels. Occupational status may give indicators of income potential but is less concrete than the explicit calculation represented by the debt-to-income ratio.