How do Banks Compute the Maximum Loanable Amount
Banks rarely publish their rules on how they determine the maximum loanable amount for loans. However, it is logical to assume that the maximum loanable amount should be dependent on the paying capacity of the loaner.
The Philippine National Bank (PNB), for example, determines the maximum lonable amount for the purchase of the real estate to be the lowest of;
* Actual Need
* Paying capacity (only 30% of gross monthly income can be used as amortization)
* Some percentage of the appraised value of the property.
The criteria are logical since bank won’t lend money greater than what is needed or greater than the paying capacity of the client - for risk management purposes.
For small income earner, paying capacity is the common limiting factor to have a higher amount of money that they can loan.
To determine your loanable amount based on paying capacity, assuming you want a real estate loan of $1.75 Million that is payable in 20 years. Your monthly amortization should be around $19,200. If your monthly income is only $30,500, your paying capacity is 30% of your gross income or simply $9,150, which is equivalent to only 48% of your required monthly amortization. Your maximum loanable amount is, therefore, just the 48% of the loan that you want, or simply, for this example, $834,000 only.
Paying capacity of 30% gross income is more likely the percentage used by most banks (at least in the Philippines). I had once applied for a real estate loan and the bank (not PNB) just gave me a maximum loanable amount that was more likely determined using the computation above.
Just a thought, aside from the paying capacity, I think, the bank should also consider the debtors existing assets or money at hand in determining the maximum loanable amount.
Filed in: Money and Investing
Local date: February, 2012