Maximum Loan Amount
What is 'Maximum Loan Amount'
A maximum loan amount describes the total amount that a borrower is authorized to borrow. Maximum loan amounts are used in standard loans, credit cards and line of credit accounts.
BREAKING DOWN 'Maximum Loan Amount'
The maximum loan amount for a borrower is based on various factors and determined by the loan underwriter. A maximum loan amount will be provided to the borrower if approved for a loan. Lenders typically base a maximum loan amount on their own risk diversification parameters and the credit profile of a borrower. Government sponsored loans may also dictate a maximum loan amount for certain types of loans
Standard Underwriting Procedures
A maximum loan amount is based on a combination of different factors. Lenders consider a borrower’s debt-to-income and credit score in the underwriting process which helps to determine how much they believe the borrower would be able to repay. Lenders generally seek borrowers with debt-to-income ratios of 36% or less, also using debt to-income as a variable for determining a maximum loan amount. 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 secured loans and specifically mortgage loans, lenders use an additional qualifying ratio called the housing expense ratio. They also base a maximum loan amount on customized loan-to-value thresholds. Mortgage loans generally follow standard underwriting procedures with these variables also a part of the decision on how much to lend to a borrower.
Lenders will typically look for a housing expense ratio of 28%. This ratio is a comparison of a borrower’s total housing expenses with mortgage payments. Similar to standards loans, secured lenders will also analyze a borrower’s debt-to-income with 36% being the common threshold required. Additionally, secured loans will also factor in a loan-to-value ratio in the underwriting process. Secured lenders will often lend a maximum total amount of approximately 70% of a secured asset’s collateral value.
Government Sponsored Loans
Government sponsored loans offer some exceptions. These loans may accept borrowers with debt-to-income ratios of up to 50%. In the mortgage industry, the Federal Housing Finance Administration publishes the maximum amounts for loans sponsored by Fannie Mae. This report can be found here. Freddie Mac also publishes loan limits annually with their 2018 report available here. Since Fannie Mae and Freddie Mac guarantee a large percentage of mortgages originated in the United States, the "conforming loan limit" is an important number in the mortgage finance industry.