Maximum Loan Amount Calculation
When extending credit, there is a need to set maximum exposure to a customer, which depends on risk appetite. Another important consideration is the debt to income of a customer. Usually, a regulator defines limits for debt to income, including the way it should be calculated.
The debt to income is sometimes part of the evaluation that considers affordability criteria. Affordability criteria consider not only the loan amount but also the maximum monthly repayment amount.
The monthly repayment should not exceed a certain percentage of the customer's monthly disposable income. The maximum monthly repayment is defined as the lower of the two values: the maximum monthly repayment according to the customer's affordability and the maximum monthly repayment of the customer's current obligations according to their debt service coverage ratio (DSCR).
The affordability criteria may include the number of people in the household and the disposable income of not only the borrower but relative exposure and disposable income of the whole household.
This is because, in some countries, the household is considered one economic unit, and all members of the household are held responsible for the debt.
For setting up the loan amount calculation, the steps are
- Regulatory-defined DTI formula
- A credit check and consideration of all outstanding loans
- Household specifics, expenses, and expected affordable monthly repayment
