Which statement defines the term capacity? A. a borrower's willingness to repay a loan B. a borrower's ability to repay a loan C. a borrower's total assets

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Mathematics

Savion Ortiz

7 February, 23:13

Which statement defines the term capacity? A. a borrower's willingness to repay a loan B. a borrower's ability to repay a loan C. a borrower's total assets

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Willow Jacobson · Answer 1

B. A borrower's ability to repay a loan

Step-by-step explanation:

Capacity measures the borrower's ability to repay a loan by comparing income against recurring debts and assessing the borrower's debt-to-income (DTI) ratio. Lenders calculate DTI by adding together a borrower's total monthly debt payments and dividing that by the borrower's gross monthly income. The lower an applicant's DTI, the better the chance of qualifying for a new loan. Every lender is different, but many lenders prefer an applicant's DTI to be around 35% or less before approving an application for new financing.