Maximum Loan Amount Definition and Factors Lenders Consider
Betsy has a background in international finance and has expanded her expertise to journalism, drawing on her experience in academia and professional services.
A maximum loan amount, or loan limit, is the total sum that can be borrowed by an applicant. It applies to standard loans, credit cards, and line-of-credit accounts.
The maximum loan amount depends on various factors, including the applicant’s creditworthiness, loan length, loan purpose, collateral, and the lender’s criteria.
Key Takeaways:
– A maximum loan amount refers to the total sum authorized for borrowing on various credit lines.
– Lenders consider debt-to-income ratio, credit score, credit history, and financial profile when determining the maximum loan amount.
– Different types of loans have different requirements, but most lenders prefer borrowers with a debt-to-income ratio of 36% or less.
Understanding the Maximum Loan Amount:
The maximum loan amount is determined by a loan underwriter based on several factors. It represents the maximum approved amount for a borrower. Lenders assess the borrower’s debt-to-income ratio to gauge their repayment capability and determine the appropriate loan amount. Lenders generally seek borrowers with a debt-to-income ratio of 36% or less.
Lenders also consider their risk parameters when determining the borrower’s total principal, which can influence the maximum loan amount.
In addition to the debt-to-income ratio, underwriters analyze the applicant’s credit score, credit history, and other factors to establish the maximum loan amount.
Unsecured Lending:
Credit cards are an example of unsecured lending. Credit card issuers evaluate credit history, including repayment history, the number of credit accounts, and the length of credit history, to determine the maximum loan amount or credit limit. They also assess inquiries and derogatory marks on the credit report, such as bankruptcies, collections, civil judgments, and tax liens. Work history may also be considered.
Personal loans are another form of unsecured lending. Banks, peer-to-peer (P2P) websites, and other lenders utilize credit history, debt-to-income ratio, and other underwriting factors to establish interest rates. Those with excellent credit receive better rates than those with bad credit.
Personal lines of credit (LOC) provide access to money without interest until borrowed. Better credit scores may lead to a lower annual percentage rate.
Secured Lending:
Secured loans, particularly mortgage loans, introduce the housing expense ratio, comparing housing expenses to pre-tax income. Housing expenses encompass mortgage principal and interest payments, property taxes, hazard insurance, mortgage insurance, and association fees. Lenders generally look for a housing expense ratio below 28%. Debt-to-income ratios are also assessed, with 36% being the common threshold.
Secured lenders establish maximum loan amounts based on customized loan-to-value thresholds, often lending between 70%-90% of an asset’s collateral value. These variables also guide the decision-making process for mortgage loans.
A home-equity line of credit (HELOC) is a form of secured lending based on home equity. With a potentially lower interest rate and higher loan amount than a credit card, it can be a preferable option. However, failing to repay the borrowed amount can result in the loss of one’s home.
Government-Sponsored Loans:
Government-sponsored loans offer exceptions to underwriting requirements and maximum loan amounts for certain types of home loans. These loans may accept borrowers with debt-to-income ratios of up to 50%. The Federal Housing Finance Agency (FHFA) publishes the maximum amounts for loans sponsored by Fannie Mae and Freddie Mac, key entities in the mortgage industry. The "conforming loan limit" is an important figure in the mortgage finance industry since it aligns with these entities’ guidelines.
The maximum conforming loan limit for one-unit properties in most parts of the U.S. was $766,550, increased from $726,200 in 2023.
