When Your Out Of Pocket Exceeds Your Income-Downfall Starts-15

Capacity is simply your ability to comfortably repay the loan. It can be
shown in this role-play:
Paulie: Donna, may I borrow $20?
Donna: How quickly can you easily repay it?

Capacity is reflective of your income. Your loan officer will scrutinize
your ability to repay a loan by looking at your employment and salary.
They want to see a long and stable employment history. Stability also
includes whether your occupation is riddled with industry-wide or
seasonal lay-offs.

Since capacity is that it is your ability to comfortably repay your debt
obligations, lenders will compare your total expenses with your income.
If your present debt expense is too great a percentage of your monthly
income, you may be denied credit because you don’t ratio.

Owen returned the phone to the cradle. “Fran, we didn’t
get the loan.”

After a long pause Fran asked why. Owen explained that
their current debt payments were too high. Even though
the refinance would allow them to pay some of the bills, and ultimately
they would have lower monthly payments and be paying a lower interest
rate, the mortgage company said the numbers still didn’t work.

“I may be able to pick up a few more hours a week at the store”, she
offered.
“No, we’ll just apply for another credit card. There should be a pre-
approved card application in the mail in a few days. We seem to be
getting them every week or so. In the meantime, we’ll have to cut back

a little around here. I don’t understand why the numbers didn’t work.
The company said something about our monthly payments being too
high compared to our income...”


There are a couple of key ratios that lenders look to when making a
credit decision. The first is the Debt-to-Income ratio. This ratio
considers your overall monthly debt payment and compares it with your
monthly income.