Final answer:
The debt limit ratio typically refers to the debt-to-income ratio in personal finance, which is calculated by dividing total monthly mortgage payments by total monthly gross pay. (option a)
Step-by-step explanation:
The debt limit ratio is a financial metric used to assess an individual's or household's ability to manage debt repayment given their income. In the context related to personal finance and mortgages, this ratio is typically referring to the debt-to-income ratio, which is a comparison of a person’s monthly debt payments to their monthly income.
A common approach to calculate this in the mortgage industry is option (a) from your list, where the total monthly mortgage payments are divided by the total monthly gross pay. This helps lenders determine how much additional debt a borrower can handle, which is essential for decisions about home loans, auto loans, and other forms of credit.
For example, if a person wants to buy a house and they know their annual take-home pay and their estimated monthly expenses, they can use this information to calculate how much they can afford to spend on a mortgage each month, and thus, determine their borrowing limit. This process is vital in homeownership and securing a mortgage that fits within one’s budget.