This Loan Affordability Calculator gives you an estimate of the maximum loan or mortgage amount you could receive. The affordability amount is based on how much you can afford to spend per month. The Loan Affordability Calculator is meant for illustrative purposes only. Should you wish to take out a loan or a mortgage, speak with a financial advisor.

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What is a Credit Score?

A credit score is a number assigned to a borrower by a credit-reporting agency. Lenders use applicants’ credit scores to determine whether they are likely to pay back a loan on time. A higher credit score indicates that the applicant is more likely to pay back a loan on time. Lenders will also consider the number of credit inquiries that are made to the applicant’s credit history within a certain period of time.

Why do lenders consider income stability?

Income stability is based on the applicant’s income history and how long the applicant has worked for the current employer. When applicants have had jobs for a long time and have a stable income, their income is likely to continue being stable . Lenders will also consider applicants’ payment history and whether they make their payments on time.

What is a Debt-to-Income (DTI) Ratio?

The DTI ratio is the amount of debt divided by the applicant’s gross monthly income. The DTI ratio is used to determine an applicants capability to pay back a mortgage. A high DTI ratio indicates that the applicant has a high debt load compared to their income. For example, an applicant with a monthly income of $3,000 and a monthly mortgage payment of $800 is said to have a DTI ratio of 25% ($800 divided by $3,000).

A DTI ratio of 40% or higher is considered high risk. Lenders will also consider the types of debt the applicant has. Credit-card debt is a high-risk mortgage payment. This is because the borrower can easily become delinquent or face a significantly higher interest rate if the borrower misses a payment.

How is a loan affordable?

Mortgage lenders use a variety of methods to determine whether a mortgage is affordable. The most common method is to use a percentage of the applicant’s gross, before-tax, monthly income to determine the maximum mortgage the applicant can afford to pay. Lenders figure the maximum mortgage payment by adding the monthly mortgage payment to the monthly debt payments for credit cards, car loans, and other loans the applicant has. This total is then divided by the applicant’s monthly gross income. The maximum amount that can be borrowed is the monthly gross income multiplied by the lender’s “affordability ratio”. This is expressed as a percentage. For example, if an applicant has a monthly gross income of $5,000 and an affordability ratio of 28%, the maximum mortgage payment is $1,400 a month.

What are secured loans?

A loan is secured by collateral when the borrower pledges an asset (such as a house or car) to the creditor as security for the loan. The creditor can repossess the collateral if the borrower fails to make loan payments.

What are unsecured loans?

A loan is unsecured when the borrower does not pledge an asset as security for the loan. The creditor can only recover the loan by suing the borrower in a court of law.