What Is the Maximum Loan Amount?
A maximum loan amount, or loan limit, describes the total amount of money that an applicant is authorized to borrow. Maximum loan amounts are used for standard loans, credit cards, and line-of-credit accounts.
The maximum will depend on several factors, including a borrower's creditworthiness, loan length, loan purpose, whether the loan is backed by collateral, and various criteria of the lender.
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.
- Government-sponsored, unsecured, and secured loans have different requirements; however, most lenders generally seek borrowers with debt-to-income ratios of 36% or less.
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 maximum amount of money 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 will also 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 are also available unsecured. Banks, peer-to-peer (P@P) 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 (LOC) are another form of unsecured loan, which gives you access to money 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 between 70%-90% 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 (HELOC) 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 can 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.
$766,550
The maximum conforming loan limit for one-unit properties in most parts of the U.S. The limit increased from $726,200 in 2023.
What Criteria Do Lenders Use to Calculate the Maximum Loan Amount?
Lenders will consider several factors including credit score, debt-to-income ratio, the purpose of the loan, the type of loan, and more. In general, the lower your debt-to-income ratio and the higher your credit score, the higher you can expect the maximum loan amount to be.
What Do Lenders Use to Determine Who Qualifies for a Loan?
Credit score is one of the biggest factors. Scores of 800 or greater generally are considered excellent, while 740–799 is considered very good, and 670–739 qualifies as good. The lower an applicant's score, the more difficult it will be to get approved. Those with good but not excellent credit may still be approved, but they are more likely to pay higher interest rates.
What Is a Good Maximum Loan-to-Value Ratio?
A loan-to-value ratio measures how much of an asset is financed compared to the overall value of the asset. For example, if you take out a $400,000 mortgage to purchase a $500,000 home, the loan-to-value ratio would be 80%. What constitutes a good maximum loan-to-value ratio depends on the type of loan. Some homebuying programs allow buyers to put down as little as 3%, meaning the loan-to-value ratio would be 97%—but that can be risky for the borrower if the value of the home decreases due to market conditions or other factors.
The Bottom Line
When lenders approve a loan or a line of credit, it typically comes with a maximum loan amount. This is the maximum amount of money that can be borrowed. What the maximum loan amount will be depends on multiple factors such as the borrower's creditworthiness and the type and purpose of the loan.
