How to Calculate Loan Eligibility

By DB Jenkins

Loans are extended only to customers who meet income and credit guidelines. Most lenders use their own set of proprietary guidelines but there are standard calculations that all lenders use to determine eligibility. If you are in the market for a loan, you need to review your own income and credit before you begin applying. You can narrow your search for lenders once you understand the numbers and scores.

Calculate your debt-to-income ratio (DIR). This is the calculation lenders use to determine your financial ability to repay a loan. To figure your DIR, divide the total of all monthly, credit-reportable bills by your monthly gross income. Most lenders want to see a DIR below 40 percent.

Review your credit report. Lenders look at a FICO score and review your open and closed accounts, public records (like judgments) and credit inquiries. If you have several credit cards with high balances, you may have a tougher time getting approved. Any public record will be an impediment during a loan process.

Review your income documents. The easiest income to verify is W-2 income. Lenders will calculate your monthly gross and net income using your pay checks. If you are self-employed, though, you will need to calculate monthly cash flow by adding together 12 months of deposits and dividing that sum by 12.

Research loan programs based on the information you collect. For example, if you have excellent credit, a low DIR and a good mix of credit accounts, you can apply to the most competitive programs. However, if you experienced some credit trouble, you may also need to apply at finance companies.

Pull a valid copy of your credit report from Annual Credit Report in Resource 1. These credit reports are fee. You should, however, pay for a copy of your FICO score, too. This is a three-digit number between 300 and 850. It represents your overall creditworthiness. Scores above 720 are excellent; scores below 600 are poor. Generally, a FICO of at least 620 is required for most loans.

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