Dollars & Sense: What Is the Maximum Loan Amount?

Melanie Sedam

A maximum loan amount describes the total amount that an applicant is authorized to borrow. Maximum loan amounts are used for standard loans, credit cards, and line-of-credit accounts.

Key Takeaways

* A maximum loan amount describes the total sum that one is authorized to borrow on a line of credit, credit card, personal loan, or mortgage.

* In determining an applicant’s maximum loan amount, lenders consider debt-to-income ratio, credit score, credit history, and financial profile.

Understanding the Maximum Loan Amount

A maximum loan amount for a borrower is based on a combination of factors and determined by a loan underwriter. It is the most that will be provided to a borrower if the loan is approved. Lenders consider a borrower’s debt-to-income ratio during the underwriting process, which helps to determine how much they believe the borrower would be able to repay, and, therefore, what the maximum loan amount should be. Lenders generally seek borrowers with debt-to-income ratios of 36% or less.

Lenders must also consider their own risk parameters when determining a borrower’s total principal. Thus, maximum loan amounts can also be based on the risk diversification of a lender.

In addition to the applicant’s debt-to-income ratio, underwriters take into account a variety of factors, including credit score and credit history, in determining the maximum loan amount an applicant can borrow.

Unsecured Lending

Credit cards are an example of unsecured lending. Credit card issuers also use underwriting to determine how much they trust a borrower to repay—the maximum loan amount or credit limit. One of the primary factors they consider is credit history, which includes repayment history, the number of credit accounts on a report, and the length of a person’s credit history. Credit card issuers also will check the number of inquiries on a credit report and the derogatory marks, which include bankruptcies, collections, civil judgments, and tax liens. They also may take into account an applicant’s work history.

Personal loans also are available unsecured. Banks, peer-to-peer websites, and other lenders use credit history, debt-to-income ratio, and other types of underwriting to set the rates at which they are willing to lend money. The better your credit rating, the better the rates you will be offered; people with excellent credit are offered much lower rates than those with bad credit.

Personal lines of credit are another form of unsecured loan, which give you access to an amount of money that you can borrow when you need it, and there’s no interest until you borrow. Having better credit scores may help you qualify for a lower annual percentage rate.

Secured Lending

With secured loans (specifically mortgage loans), lenders use an additional qualifying ratio called the housing expense ratio, which compares the borrower’s housing expenses to their pre-tax income. Housing expenses generally include the potential mortgage principal and interest payments, property taxes, hazard insurance, mortgage insurance, and association fees. Lenders will typically look for a housing expense ratio no higher than 28%. Similar to standard loans, secured lenders will also analyze a borrower’s debt-to-income with 36% being the common threshold required.

They also base a maximum loan amount on customized loan-to-value thresholds. Secured lenders will often lend a maximum total amount of approximately 70% of a secured asset’s collateral value. Mortgage loans generally follow standard underwriting procedures, with these variables also a part of the decision on how much to lend to a borrower.

A home-equity line of credit is another form of secured lending. As its name implies, the maximum loan amount is based on the equity you have in your home. If you need money, it can be a better choice than a credit card because the interest rate may be lower and the amount you can borrow higher. If you have trouble paying back what you borrow, however, you may risk losing your home.

Government-Sponsored Loans

Government-sponsored loans offer some exceptions to the 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%. In the mortgage industry, the Federal Housing Finance Agency (FHFA) publishes the maximum amounts for loans sponsored by Fannie Mae. Freddie Mac also publishes loan limits annually. Since Fannie Mae and Freddie Mac guarantee a large percentage of mortgages originated in the United States, the “conforming loan limit”—that is, loans that conform to these entities’ guidelines—is an important number in the mortgage finance industry.

Melanie is the owner and loan originator for The Paseo Group and can be reached at 520-829-5210 ext. 2.