# Loan Prequalification Calculator

Last Updated :

21 Aug, 2024

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Reviewed by :

Dheeraj Vaidya

Table Of Contents

## What Is Loan Prequalification Calculator?

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

This is a very useful tool that is often used by borrowers to make an estimate of their borrowing capacity, and lenders can also use it to assess the creditworthiness of the borrower. Overall, it stops individuals from going overboard with loans and help maintain financial stability and security.

##### Table of contents

### Loan Prequalification Calculator Explained

The loan prequalification calculator is the first step towards the idea for applying for a loan. It is a quick and simple way to accumulate all financial details of the prospective borrower and finally determine the affordability.

The formula for calculating Loan prequalification that most financial institution use is given below:

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.

**Loan Amount = L * (1 – (1+i)**

^{-n}/ i)The formula of **home loan prequalification calculator** to calculate GDPI Ratio that most of the financial institution use as one of the criteria is per below:

**D / GPI * 100**

Wherein,

- D is the total debt payment per period, including the proposed loan repayment amount
- GPI is the Gross Periodical Income
- PV is the present value of the loan recommendation
- L is the Proposed Payment
- n is the frequency of payments
- i is the rate of interest

There is no one mathematical formula that can determine the pre-qualification loan amount using the **home loan prequalification calculator** 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?

Even before trying to apply for a loan, it is important to understand and assess whether the prospective borrower even qualifies for the loan or not. This **mortgage loan prequalification calculator** solves this problem in a big way. This process normally does not affect or hurt the credit score of a borrower because it is just an initial process. But it is always better to check with the lender regarding the same.

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 in a **mortgage loan prequalification calculator**, we divide the value in step 4 by the value in step 5, which shall yield the Debt to Income ratio 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.

Overall, this is a calculator that makes use of various preliminary financial information and details that will give an idea about the capacity to afford a loan that will meet the target purchase or investment amount.

It is interesting to note the various common factors that in a **personal loan prequalification calculator**, typically influence the loan limits and repayment capacity. Among a wide range of factors, some noteworthy ones are debt-to-income ratio, the credit score which normally depends on how much loan the borrower had previously taken and paid back on time, the down payment amount that they need to pay while taking any loan and most importantly the interest rate, which will determine the cost of borrowing.

However, it is important to note that a **personal loan prequalification calculator** is not a guaranteed calculation in any way and should not be used to come to final conclusion regarding borrowing, because there are many other external and internal factors that needs to be considered while taking loan which may be subjective in nature and hence not used in the calculator. But it is definitely a great step to start with the process so that one gets an idea about the financial capacity.

### Example

Let us understand the concept of **online mortgage prequalification calculator** with the help of a suitable example, as mentioned below:

Mr. Christopher is a qualified accountant working in a multinational company 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.

**DGPI Ratio = D / GPI * 100**

- = ($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%.

**Loan Amount Recommended = L * (1 – (1+i)**

^{-n}/ i)- = 1,045 *
- = $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.

Thus, from the above example, it is clear that the tool can be used to assess the pre-qualification of taking a loan. It compels us to check our financial levels, the size and amount of borrowing that we wish to go for, whether the interest rate is suitable for us to handle and repay the loan on time and finally how it may impact the current and future financial condition or the borrower as well as people who are dependent on them.

Even though it is an efficient tool of **online mortgage prequalification calculator** for prequalification calculation, there are some requirements that the borrower has to keep ready to expedite the entire process of the calculator. Some of them worth mentioning are the annual income, the estimated monthly instalments on existing loan the borrower is already handling, the Social Security Number or the Individual Taxpayer Identification Number (ITIN) an finally the down payment amount that they can possibly afford. If all details are available and well in order, then it is possible to feed the information easily into the calculator. Most applicants receive the decision instantly online or maybe by a phone call, when they apply for it.

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.

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