Loan Prequalification Calculator Step By Step Guide With Example

Loan Prequalification Calculator

Loan Prequalification Calculator can be used to calculate the Prequalification amount that the borrower would be able to borrow provided his annual income and other factors such as whether any down payment would be made or any existing loans etc.

About Loan Prequalification Calculator

The formula for calculating Loan prequalification that most financial institutionFinancial InstitutionFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. read more use is given below:

Loan Prequalification Calculator

L x [1 – (1+i)-n / i]

L is the Proposed Payment
n is the frequency of payments
i is the rate of interest

Now one can determine the monthly installment the borrower can repay by deducting the debt portion and savings required, a post that uses the below formula for calculating Loan prequalification recommended to borrow.

The formula to calculate GDPI Ratio that most of the financial institution use as one of the criteria is per below:

Wherein,

D is the total debt payment per period, including the proposed loan repayment amountGPI is the Gross Periodical IncomePV is the present value of the loan recommendationL is the Proposed Paymentn is the frequency of paymentsi is the rate of interest

There is no one mathematical formula that can determine the pre-qualification loan amount as it is based on quantitative and qualitative factors such as Debt to income ratio, which should be ideally less than 36%, then if any down payment is to be made by the borrower, or any default has been made by the borrower or the security that has been offered.

All these qualitative factors will be based on a case-to-case basis and also depend upon the bank’s rules. This will also depend upon what tenure the borrower is looking for the repayment. The longer the duration, the riskier it becomes for the bank and accordingly impacts the loan amount or rate of interest. Further, the credit score and any existing loans determine the loan amount.

How to Calculate Using Loan Prequalification Calculator?

One needs to follow the below steps in order to calculate the loan amount.

Step #1 – First, determine the funds the borrower requires and the term for which he is ready.

Step #2- Check the financial institution’s terms and conditions and rules through which the loan is sought.

Step #3 – Determine whether the borrower meets those qualitative requirements such as security needed, if any, number of dependents compliance, nature of income, payment for existing debts, number of sources of income, etc. This will depend on case to case, as stated earlier.

Step #4 – Now, do the quantitative calculations, such as calculating the periodical payments made by the borrower and the new periodical installments due to new loans.

Step #5 – Calculate the gross periodical income of the borrower, including all the sources of income.

Step #6 – Now divide the value in step 4 by the value in step 5, which shall yield the Debt to Income ratioDebt To Income RatioThe Debt to Income (DTI) ratio measures the ability of an individual or entity to pay back their debt or installments easily without any financial struggle.read more that should be ideally less than 36% but again, it depends upon bank to bank.

Step #7 – Now calculate the monthly installment the borrower is ready to pay from his GPI and deduct the debt and savings he wishes to keep.

Step #8 – Now use the present value formula to determine what loan amount would be eligible for the borrower to borrow.

Example

Mr. Christopher is a qualified accountant working in a multinational companyMultinational CompanyA multinational company (MNC) is defined as a business entity that operates in its country of origin and also has a branch abroad. The headquarter usually remains in one country, controlling and coordinating all the international branches. read more for a couple of years and is now looking to borrow mortgage loans. His credit score has been in a range of 721 to 745 as of the loan application date. He will be providing his home as security to the bank, which values around $120,000. His loan requirement is $200,000.

He wants the tenure to be for 20 years and wants to make monthly payments of installments. Currently, he has $455 as his existing debt payment, and he has a credit debt of $5,000 as outstanding. He is ready to make a down payment of up to 20% of the property’s value. The bank has listed the terms and conditions below to know the eligible loan amount that Mr. Christopher can borrow.

The Bank’s marginal cost of the capital rate at the moment is 6.95%. Mr. Christopher wants to pay $455 towards debt, and he wants $500 out of his gross income to spend on home expenditures, and the rest he can pay for mortgage debt. He currently earns $2,000 monthly.

Based on the given information, you must recommend what loan amount he can borrow and whether it meets its fund’s requirement.

Solution:

We need to calculate the interest rate first, which shall be applied towards his loan.

Below is the calculation of the same.

We shall now determine Mr. Christopher’s net income before the proposed new debt payment.

$2,000 is his gross income, less existing debt payment of $455 and $500 towards the home expenditure, and hence remaining net income would be $1,045, which he can use to pay the installment amount on the proposed loan.

The Proposed Installment amount will be the existing debt, which is $455, and the desired installment amount will be $2,000, less than $455, and less than $500 towards a home, which is $1,54,5, and we can use the below formula to calculate DGPI ratio.

= ($455 + $1,045) / $2,000 x 100=75%

This loan amount will impact, which we will calculate later on.

We now have a rate of interest as 6.95%, and if compounded monthly, then the rate would be 6.95%/12, which is 0.58%.

= 1,045 * [1 – (1+0.58%)-20*12 / 0.58%]= $135,310.02

The desired loan will be reduced by 35% as his DGPI is greater than 36%, which shall be $200,000 x ( 1 – 0.35), which is $130,000

Since his credit score is 721 to 745, he can avail of 95% of the loan. Hence net loan that a bank will offer is $130,000 x 95%, which is $123,500

Now, as per the quantitative requirement, he can avail loan of up to $135,310.02, whereas Bank will offer a net of $123,500 only per qualitative and quantitative requirements, and the difference he would need to arrange by himself or he can consider another bank for a loan.

Conclusion

As seen above, this is a multifaceted issue and cannot be just determined only based on a formula that determines how much one can borrow. Both qualitative and quantitative rules apply, as discussed in the above example.