Capacity (Lending)

Full definition

Capacity answers the lender's core question: can this borrower actually afford to make the monthly payments? Unlike credit history (which shows what the borrower has done in the past), capacity looks at whether the borrower's current financial situation supports adding a new debt payment. How capacity is measured: Debt-to-income ratio (DTI): the primary capacity metric. Total monthly debt obligations divided by gross monthly income. A 10% DTI (monthly payments = 10% of income) represents high capacity. A 50% DTI represents very low capacity. Most personal loan lenders require DTI below 40%; many prefer below 35%. Residual income: income remaining after all debts and essential expenses. Higher residual income means more buffer if income dips. Employment stability: a salaried W-2 employee has more predictable income than a self-employed contractor. Lenders assign higher capacity confidence to stable employment. How to increase your capacity before applying: Pay off small debts to reduce monthly obligations. Increase income (and document it: pay raise, second job, rental income). Time the application to avoid periods of low income (seasonal workers apply during peak season). Include all income sources - alimony, social security, investment income, rental income all count under ECOA. Capacity vs creditworthiness: Credit score measures past behavior; capacity measures present ability. A borrower with a 780 FICO score but 55% DTI (income barely covers existing debts) has excellent creditworthiness but poor capacity. Most lenders consider both - a high credit score cannot fully compensate for truly insufficient income.

• Debt-to-income ratio (DTI)
• Creditworthiness
• Gross Income
• Net Monthly Income