Maximum Loan Amounts and the Factors That Affect Them
You may have come across the term “maximum loan amount” if you are on the lookout for installment loans and comparing rates. This term, also called the loan limit, indicates the total amount of money a lender allows you to borrow.
You may also find these terms used for credit cards and line-of-credit accounts.
The maximum loan amount may vary from one borrower to another. It will depend on certain factors such as your creditworthiness, the length of your loan, the purpose of your loan, and whether you have collateral.
This article will run you through everything you need to know about the maximum loan amount and the factors that can affect it.
Why Does the Maximum Loan Amount Vary?
Lenders must impose a maximum loan amount to protect themselves from online payday loan scams and borrowers’ bankruptcy. If a borrower is unable to repay the loan or goes bankrupt, the lender will never get their money back.
They usually consider a borrower’s debt-to-income ratio to determine how much a borrower will be able to repay. They would usually look for a debt-to-income ratio of 36% or less.
Maximum Loan Amount in Unsecured Lending
For unsecured lending such as credit cards, the lender will set a credit limit as the maximum loan amount. They will consider your credit history, repayment history, number of credit accounts you have, and the duration of your credit history.
Inquiries on a credit report and derogatory marks such as bankruptcies, civil judgments, and tax liens can affect this amount.
There is also unsecured lending through personal loans from banks or peer-to-peer websites. You will get better rates for these loans with a better credit rating.
Maximum Loan Amount in Secured Lending
Secured loans such as mortgage loans use a different qualifying ratio called the housing expense ratio. This puts your housing expenses against your pre-tax income.
These housing expenses include your mortgage principal, interest payments, property taxes, insurances, and association fees.
Lenders usually look for a housing expense ratio of 28% or less. They will also look for a debt-to-income ratio of no more than 36%
Another form of secured lending is the home-equity line of credit or HELOC. This bases your maximum loan amount on the equity you have in your home. This is a better choice because this usually has a lower interest rate and a higher maximum loan amount.
However, if you have trouble paying these loans, you can risk losing your home.
Maximum Loan Amount in Government-Sponsored Loans
Government-sponsored loans can give exceptions to the underwriting requirements and offer higher maximum loan amounts for certain home loans. Some borrowers can have a debt-to-income ratio of up to 50.2%.
Government-sponsored enterprises like Fannie Mae and Freddie Mac publish their loan limits annually and guarantee a large percentage of mortgages in the US.
For lenders to protect themselves, they set a maximum loan amount based on a borrower’s ability to repay the loan. It is essential to take note of your debt-to-income ratio and housing expense ratio before applying for loans to ensure that you get better interest rates and higher borrowing limits.
Are you looking for loan companies in Opelika, AL? Opelika Finance offers a variety of personal loans to fit your needs. Contact us today to learn more!