For any loan repurchase request, the borrower must know his borrowing capacity; this corresponds to the maximum loan amount that you can obtain over a certain period. The amount of his income and the amounts of his monthly loan payments, as well as these charges such as rent, determines the financial situation.
It is from this financial situation that we can determine borrowing capacity. Expenses such as gas, electricity and the telephone are not taken into account in the calculation of debt. We will explain how you can get a loan buy-back while respecting your borrowing capacity and how to calculate it.
What is borrowing capacity for?
This term is mainly used for borrowers who wish to access the property and therefore make a home loan. But it is also valid for all new projects. You want a car for your trips to work, but does your daily budget allow you to borrow? Do you have to pay rent or a mortgage? Do you have dependent credits? So many questions to ask yourself to find out what your borrowing capacity is.
You already have credits and your borrowing capacity is too high for the real estate project you are looking for. You have to review the repayment period and the amount of your monthly payments to find out the repayment capacity you can have.
Borrowing capacity is the maximum amount of credit that a borrower can borrow from his bank or a broker to finance a real estate project or a new project or a repurchase of credit.
How to determine and calculate your borrowing capacity to buy back credits
- Borrowers must calculate their income in a reasonable manner.
- Calculate all of your expenses.
Through this example we will explain how to determine your borrowing capacity:
Michel and Laetitia are both 35 years old, they have 2 dependent young children. Michel is an employee in the private sector, he has a net income of $ 1,800 per month and he receives the 13th month. He also received exceptional bonuses for a total amount of $ 3,000 over this year and last year he did not receive any premiums so his premiums will not be used in the calculation of future income.
However, you have to add your thirteenth month to your monthly income, so $ 1,800 * 13 = $ 23,400 / 12 = $ 1,950. The amount retained for Michel’s total income is, therefore, $ 1,950 per month. Laetitia co-borrower is a civil servant, she receives $ 1,750. The family allowance pays them $ 131.50 per month.
Taking into account that the children are young one will take into account his income. The total amount received for all of their income is $ 1,950 + $ 1,750 + $ 131.50 = $ 3,831.50 . Borrowing capacity is determined from the total income.
Calculate your credit charges or rent:
Michel and Laetitia are tenants and they have a rent of 800 $ per month. But they have a car loan on which they pay back $ 370 per month. They also have and a personal loan they took to get married last year and the monthly payment is $ 450, they have 6 years to repay.
The total of all their loan charges represents $ 800 to which the rent is added, giving a total charge of $ 1,620 per month. They have a debt ratio of 42.28% (the calculation of the debt ratio is the total amount of expenses divided by the total amount of income, ie 1620 / 3831.50 = 0.42 * 100 = 42.28%).
They have a real estate project of 210,000 $ but their borrowing capacity does not allow them to acquire their property.
The debt ratio is too high; it exceeds 33% of the debt to be eligible for a mortgage. Suddenly, the borrowing capacity is lower than the repayment of their rent which means that if they want to buy with their current loans, the new monthly payment of the mortgage should not exceed one-third of their income (calculation 3831/3 = $ 1,277 – $ 800 =) $ 477. This repayment amount with a 1.5% rate allows them to borrow $ 119,500 over 25 years.
How to increase borrowing capacity?
Borrowers find themselves in an impasse, their financial situation does not allow them to buy the property they covet. The solution to reducing the monthly payments of current credits is to redeem these credits over a longer period in order to reduce the monthly payments and consolidate them into a single loan.
Let’s take our example again: Michel and Laetitia have a total amount of outstanding capital of $ 30,000. If we make a simulation of credit repurchase over 10 years with a rate at 3% this brings the new monthly payment to 310 $ including fees (the new monthly payment is calculated excluding insurance). The new monthly payment of $ 310 against $ 820 before gives a latitude of $ 510.
In this problem and this is the case for many borrowers, the repurchase of credits makes it possible to reduce its monthly payments by lengthening the duration. This operation of grouping loans has the effect of lowering the monthly payment of existing credits and therefore increasing repayment capacity at the level of the future project or the future home loan.
Take out a loan to increase your borrowing capacity
Suddenly borrowers recover borrowing capacity. The borrowers have a real estate project of 210,000 $ with a fixed interest rate of 1.50% and over a repayment period of 25 years. The monthly mortgage loan will, therefore, be $ 839 per month.
If we add the new monthly repayment of the loan plus the monthly payment of the mortgage, this gives the total monthly payment of the credits which is payable. Or 310 $ + 839 $ = 1149 $ monthly. If we divide this new monthly payment by the income amounts, this will give their debt ratio. Or $ 1,149 / $ 3,831 = 30%.In this example, the monthly payments of the two loans are calculated excluding insurance.