Debt Capacity

Financial Dictionary -> Debt -> Debt Capacity

Debt capacity is the amount of funds that are affordable to be used to pay on a mortgage, without being a financial strain. It is also the amount that will be confirmed by the lender that can be borrowed. This is done using a formula that will include living expenses, outstanding debts and other financial obligations.

This amount of surplus cash is then the amount that the mortgage lender will make a loan for; they will not surpass this amount as it could put financial strain on the borrower and cause delinquent loan payments.

Debt capacity is not only done for home buyers looking for a mortgage loan, it is also done for business mortgages. When done for a business property loan a business plan will also be a determining factor, this is because along with financial obligations, there are also expected profits that after an amount of time will exceed the current capacity for loan repayment. A property loan amount over the current capacity will only be loaned if the business plan is one that quickly satisfies other outstanding debts, while at the same time having financial gains.

This determination of the amount of surplus cash is not only for the lenders protection; it is also for the buyer's protection. Without this determination it could place the borrower in financial difficulties and risk a foreclosure later in the length of the loan. In this case not only could the lender lose money, but the borrower will lose the funds paid on the property and place them in position to lose the property.