Definition of maximum loan amount

What is the maximum loan amount?

A maximum loan amount, or loan limit, describes the total amount of money an applicant is allowed 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 the creditworthiness of the borrower, the term of the loan, the purpose of the loan, whether the loan is backed by collateral, as well as various criteria of the lender.

Understanding the Maximum Loan Amount

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

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

Unsecured Loans

Credit cards are an example of an unsecured loan. 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 main 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 derogatory marks, which include bankruptcies, collections, civil judgments and tax liens. They may also consider the candidate’s work history.

Personal loans are also available unsecured. Banks, peer-to-peer (P@P) websites, and other lenders use credit history, debt-to-equity 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 benefit from much lower prices than those with bad credit.

Personal Lines of credit (LOC) are another form of unsecured loan, which gives you access to a sum of money that you can borrow when you need it, and there is no interest until you borrow. Having better credit scores can help you qualify for a lower annual percentage rate.

Secure loan

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

They also base a maximum loan amount on custom loan-to-value thresholds. Secured lenders often lend between 70% and 90% of the secured assets collateral value. Mortgages generally follow standard underwriting procedures, with these variables also forming part of the decision on how much to lend a borrower.

A home equity line of credit (HELOC) is another form of secured loan. As the name suggests, the maximum loan amount is based on the equity in your home. If you need cash, it may 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 repaying what you borrow, however, you may risk losing your home.

Government sponsored loans

Government-sponsored loans offer certain exceptions to underwriting requirements and maximum loan amounts for certain types of home loans. These loans can accept borrowers with a debt-to-income ratio of up to 50%. In the mortgage industry, the Federal Housing Finance Agency (FHFA) publishes maximum loan amounts sponsored by Fannie Mae. Freddie Mac also publishes loan limits each year. Since Fannie Mae and Freddie Mac guarantee a large percentage of mortgages originating in the United States, the “compliant loan limit” – that is, loans that comply with the guidelines of these entities – is a significant number in the mortgage finance industry.