Question

Using the 28/36 ratio, determine the maximum allowable recurring debt for someone with an annual income of $86,250.

a.
$575.00
b.
$2,012.50
c.
$2,415.00
d.
$2,587.50

Answer 1

The correct answer on e2020 is $575.00

Answer 2

Option A.

Explanation:

Annual income = $86,250

Monthly income =
`(\$86,250)/(12)=\$7,187.5`

According to the 28/36 rule:

1. A household should spend no more than 28% of its gross monthly income on total housing expenses.

2. No more than 36% on all debt, including housing-related expenses and other recurring debt service.

36% - 28% = 8%

It means maximum allowable recurring debt is 8% of monthly income.

Maximum allowable recurring debt =
`7,187.5* (8)/(100)`

= $575

Therefore, the correct option is A.