Maximum loan amount: how to calculate it

Published on: 2024-08-10 17:18:42

DTI drives the affordability assessment. Affordability sets loan size, expected term, and the maximum monthly payment the customer can sustain under policy.

Cap the monthly payment at a fixed share of disposable income. Set the maximum as the lower of two values: the payment allowed by affordability, and the payment allowed after current obligations are applied under the debt service coverage ratio (DSCR).

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Affordability inputs include household size, the borrower's disposable income, total household disposable income, household exposure, and any shared liabilities reported to credit bureaus.

In some countries, the household is treated as a single economic unit. The law can make all household members responsible for the debt.

To set up the maximum loan amount, follow these steps:

  1. Apply the regulator-defined DTI formula.
  2. Run a credit check and include all outstanding loans.
  3. Include household specifics, mandatory expenses, and the expected affordable monthly payment.

Convert the maximum monthly payment into a principal cap using standard amortization. For an installment loan, maximum principal P = PMT × (1 − (1 + r)^-n) ÷ r, where PMT is the capped monthly payment, r is the monthly interest rate (use any required stress rate), and n is the term in months. For interest-only periods, calculate principal from the balloon amount, then take the minimum across structures.

Keep ratio definitions aligned with regulation and policy. DTI typically equals total monthly debt obligations, including the new loan, divided by gross or net income as specified. DSCR equals income available for debt service divided by total debt service, including taxes, insurance, and fees. Apply minimum residual income floors, rounding rules, and documented income seasoning. For variable rates, recalculate using the stressed rate or a rate cap assumption. If terms are flexible, iterate over allowed tenors and choose the highest principal that still meets all constraints.

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