Maximum loan amount: how to calculate it

DTI drives the affordability assessment. Affordability sets loan size, expected term, and the maximum monthly payment the customer can sustain under policy.

Cap the monthly payment at a fixed share of disposable income. Set the maximum as the lower of two values: the payment allowed by affordability, and the payment allowed after current obligations are applied under the debt service coverage ratio (DSCR).

Affordability inputs include household size, the borrower's disposable income, total household disposable income, household exposure, and any shared liabilities reported to credit bureaus.

In some countries, the household is treated as a single economic unit. The law can make all household members responsible for the debt.

To set up the maximum loan amount, follow these steps:

  1. Apply the regulator-defined DTI formula.
  2. Run a credit check and include all outstanding loans.
  3. Include household specifics, mandatory expenses, and the expected affordable monthly payment.

Convert the maximum monthly payment into a principal cap using standard amortization. For an installment loan, maximum principal P = PMT × (1 − (1 + r)^-n) ÷ r, where PMT is the capped monthly payment, r is the monthly interest rate (use any required stress rate), and n is the term in months. For interest-only periods, calculate principal from the balloon amount, then take the minimum across structures.

Keep ratio definitions aligned with regulation and policy. DTI typically equals total monthly debt obligations, including the new loan, divided by gross or net income as specified. DSCR equals income available for debt service divided by total debt service, including taxes, insurance, and fees. Apply minimum residual income floors, rounding rules, and documented income seasoning. For variable rates, recalculate using the stressed rate or a rate cap assumption. If terms are flexible, iterate over allowed tenors and choose the highest principal that still meets all constraints.

Frequently asked questions

How should I choose a loan term when several tenors meet the affordability limits?

First cap principal at the lower of the customer’s requested amount and the amount supported by the product’s lending criteria. Then choose the shortest permitted tenor that supports that amount and passes the payment, DTI, DSCR, residual-income, and stress-rate checks. Compare total repayment across suitable options and follow the customer’s documented needs and product policy.

What should I do when DTI and DSCR produce different loan limits?

Calculate the maximum payment allowed by each test using the applicable definitions and consistent loan assumptions. Use the lower payment cap, then convert it to a principal cap using the relevant rate and term. Do not average the limits, since each test measures a separate constraint on repayment capacity.

How should an interest-only period affect the maximum loan amount?

Assess the balloon payment at the end of the interest-only period against the borrower’s expected repayment resources and policy requirements. Calculate the principal supported by that balloon, then compare it with the principal supported by the regular payment and other affordability limits. Use the lowest supported amount, and do not treat a low initial payment as evidence that the full loan is affordable.

How should I apply a residual-income floor alongside DTI?

Calculate the payment that leaves the borrower at or above the required residual-income floor after eligible income and mandatory expenses are considered. Compare that payment cap with the DTI and DSCR caps, then use the lowest. Check that expenses included in the residual-income calculation are treated consistently with the obligations counted in the ratio tests.

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