## 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 his other factors such as whether any down payment would be made or any existing loans etc.

#### 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

### About Loan Prequalification Calculator

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

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

**Loan Amount = L * (1 – (1+i)**

^{-n}/ i)The formula 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 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 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 case to case basis and also depending upon the rules of the bank. This will also depend upon for what tenure is the borrower looking for the repayment as longer the duration, the riskier it becomes for bank and accordingly impacts the loan amount or rate of interest. Further, the credit score and any existing loans also 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 of all, determine the funds required by the borrower and the term for which he is ready for.

** Step #2- **Check the terms and conditions and rules of the financial institution through which loan is sought after.

**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 existing 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 arrived in step 4 by value arrived 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 that 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 and has been 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 the date of application of loan. 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 credit debt of $5,000 as outstanding. He is ready to make down payment up to 20% of the value of the property. The bank has lain down below terms and conditions in order to know the eligible loan amount that Mr. Christopher can borrow.

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

Based on the given information, you are required to recommend what loan amount he can borrow and whether it meets its requirement of funds?

**Solution:**

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

Below is the calculation of the same.

We shall now determine what is the net income of Mr. Christopher before the proposed new debt payment.

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

The Proposed installment amount will be the existing debt which is $455 and the desire installment amount will be $2,000 less $455 and less $500 towards a home which is $1,545 and we can use the below formula to calculate DGPI ratio.

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

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

Because of 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 than the rate would be 6.95%/12 which is 0.58%

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

^{-n}/ i)- = 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 in range of 721 to 745 he can avail 95% of the loan, hence net loan that will be offered by a bank is $130,000 x 95% which is $123,500

Now as per the quantitative requirement, he can avail loan up to $135,310.02 whereas Bank will offer net $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 on the basis of a formula that how much one can borrow. Both qualitative and quantitative rules apply as discussed in the above example.

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