How To Calculate Loan Eligibility

Loan Eligibility Formula:

\[ P = \frac{PMT}{r} \times \left(1 - (1 + r)^{-n}\right) \]

Affordable Monthly Payment (PMT):

USD

Annual Interest Rate:

Loan Term:

years

Monthly Income:

USD

Max DTI Ratio:

Maximum Eligible Loan Amount:

DTI-Based Maximum Loan (% ratio):

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1. What is Loan Eligibility Calculation?

The loan eligibility calculation determines how much you can borrow based on your affordable payment, interest rate, loan term, income, and debt-to-income (DTI) ratio. It helps borrowers understand their borrowing capacity before applying for loans.

2. How Does the Calculator Work?

The calculator uses the present value of an annuity formula:

\[ P = \frac{PMT}{r} \times \left(1 - (1 + r)^{-n}\right) \]

Where:

\( P \) — Loan principal amount (USD)
\( PMT \) — Affordable monthly payment (USD)
\( r \) — Monthly interest rate (decimal)
\( n \) — Number of months (unitless)

Explanation: The formula calculates the present value of a series of future payments (annuity) to determine the maximum loan amount you can afford.

3. Importance of Loan Eligibility

Details: Understanding your loan eligibility helps in financial planning, prevents over-borrowing, and increases approval chances by aligning your application with lender criteria.

4. Using the Calculator

Tips: Enter your comfortable monthly payment, interest rate, desired loan term, monthly income, and maximum DTI ratio (typically 36-43%). The calculator shows both payment-based and DTI-based maximum loan amounts.

5. Frequently Asked Questions (FAQ)

Q1: What is a good DTI ratio?
A: Most lenders prefer DTI below 43%. Lower ratios (36% or less) increase approval chances and may qualify you for better rates.

Q2: How does interest rate affect eligibility?
A: Higher rates reduce borrowing power as more payment goes toward interest rather than principal. A 1% rate difference can significantly impact eligibility.

Q3: Why calculate both payment-based and DTI-based amounts?
A: Your comfortable payment might be lower than what your DTI allows, or vice versa. The lower of the two amounts represents your true eligibility.

Q4: Does this include taxes and insurance?
A: For mortgages, your payment should include PITI (principal, interest, taxes, insurance). Adjust your affordable payment accordingly.

Q5: How accurate is this calculator?
A: It provides a good estimate, but final approval depends on credit score, lender policies, and other financial factors not considered here.