To meet the bank's 40 percent debt ratio with a monthly income of 10,000 and monthly expenses of 5,000, how much would need to be shaved off?

To meet the bank's 40 percent debt ratio with a monthly income of 10,000 and monthly expenses of 5,000, how much would need to be shaved off?

• A. 800
• B. 1000
• C. 1200
• D. 1500

Answer: (B)

This question hinges on applying the debt-to-income ratio. To meet a 40% limit, the monthly debt payments must be no more than 40% of the income. With a monthly income of 10,000, 40% equals 4,000. Currently expenses are 5,000, which is 1,000 more than the allowed 4,000. To hit the 40% target exactly, you’d need to reduce expenses by 1,000, bringing them down to 4,000. So, the amount to shave off is 1,000. Shaving 800 would leave you at 4,200 (still above the limit), while shaving 1,200 or 1,500 would overcorrect and push the ratio below 40%, though that would still meet the bank’s requirement.

This question hinges on applying the debt-to-income ratio. To meet a 40% limit, the monthly debt payments must be no more than 40% of the income. With a monthly income of 10,000, 40% equals 4,000.

Currently expenses are 5,000, which is 1,000 more than the allowed 4,000. To hit the 40% target exactly, you’d need to reduce expenses by 1,000, bringing them down to 4,000.

So, the amount to shave off is 1,000. Shaving 800 would leave you at 4,200 (still above the limit), while shaving 1,200 or 1,500 would overcorrect and push the ratio below 40%, though that would still meet the bank’s requirement.