A maximum loan amount is the total amount of money a lender will approve for a borrower. Maximum loan limits can apply to mortgages, personal loans, lines of credit, and credit cards. The type, length, and purpose of the loan; the lender’s requirements; your previous financial history; and whether or not the loan is backed by collateral are all factors used to determine your maximum loan amount. Let’s dive deeper into how a maximum loan amount is derived, and how it works with different types of loans.
Definition and Example of a Maximum Loan Amount
The maximum loan amount puts a cap on the amount of money a lender authorizes you to receive when you’re approved for a loan. A lender will likely consider your credit score, debt-to-income ratio, and other factors when determining your maximum loan amount. This process is called underwriting, and it helps lenders evaluate how big of a loan you’re actually able to repay so they can figure out how much money they’re willing to let you borrow.
Let’s say you apply for a personal loan to remodel your kitchen. You have a 725 credit score (700 or above is generally considered “good” by lenders); an acceptable debt-to-income (DTI) ratio (your monthly debt payments divided by your gross monthly income); and a solid payment history. Your lender approves you for a maximum loan amount of $50,000. This means you can borrow up to $50,000—but no more. In other words, if your kitchen remodel ends up costing you $55,000, you’ll have to cover the extra $5,000 yourself.
Generally, lenders prefer borrowers to have a debt-to-income ratio of 43% or less.
How a Maximum Loan Amount Works for Unsecured Loans
As their name implies, unsecured loans such as credit cards and personal loans aren’t typically secured by collateral such as property, a car, or another valuable asset you own. For this reason, they’re sometimes known as good faith or signature loans, since you’re giving the lender nothing but your word by signing an agreement that you’ll repay the loan. If you apply for an unsecured loan, your maximum loan amount will be determined by the underwriting process.
While most credit cards are considered unsecured loans, there’s one exception: a secured credit card. With this type of credit card, your maximum loan amount is usually limited to the amount of the security deposit you put down as collateral to fund the account.
The higher your credit score and the lower your debt-to-income ratio, the less risky you’ll appear to lenders. This information signals you’re a responsible steward of your debt, and your finances in general. That means there’s a greater likelihood you’ll be approved for a higher maximum loan amount, along with potentially lower interest rates and more favorable terms.
On the other hand, since unsecured loans don’t generally require collateral, if your credit score is below 700 and your debt-to-income ratio is higher than the 43% or lower target, lenders may perceive you as a higher-risk borrower. That can translate to a lower maximum loan amount, along with higher interest rates, heftier penalties for late or missed payments, and more stringent terms for the duration of your loan.
Before you apply for an unsecured loan, review your debt-to-income ratio, history of on-time payments, and your credit report to make sure there aren’t any errors. The better your financial track record, the more likely you’ll be able to qualify and get the best deal from your lender.
How a Maximum Loan Amount Works for Secured Loans
Unlike their unsecured counterparts, secured loans such as mortgages, home equity loans or home equity lines of credit (HELOCs), and car loans are backed by the collateral you’re borrowing against. That means if you default on the loan, the lender can seize your collateral, which may be your house or car, as payment. Since you’re required to put up collateral, lenders usually view secured loans as less-risky transactions. In general, that makes a secured loan easier to get than an unsecured loan, and they typically come with lower interest rates and higher maximum loan amounts.
In some cases, government organizations are responsible for setting maximum loan amount limits for some secured loans such as mortgages. The Federal Housing Finance Agency, for example, sets the limits on mortgages purchased by Fannie Mae and Freddie Mac. In 2021, the maximum mortgage loan you can get approved for in many areas of the United States is $548,250 for a single-unit property. In high-cost areas, the mortgage limit jumps to $822,375.
- Maximum loan amount refers to the most amount of money a lender will approve you for when you take out a loan.
- Factors such as your credit score and debt-to-income ratio will determine whether you qualify for a loan and your maximum loan amount.
- Maximum loan amounts tend to be higher for secured loans such as mortgages than unsecured loans, such as most credit cards.