To calculate a loan limit, start by determining the loan type (conventional, conforming, or jumbo) and the property’s appraised value. For conventional loans, the limit is the lesser of 80% of the appraised value or the conforming loan limit set by Fannie Mae or Freddie Mac (e.g., $729,750 in most U.S. counties in 2023). Jumbo loans exceed these limits and are typically based on local market rates and lender criteria. Borrowers must also meet debt-to-income (DTI) ratios (usually ≤43%) and have sufficient credit scores (typically ≥620). Lenders may adjust limits based on down payment size, occupancy status, and secondary financing.

The loan limit calculation ensures lenders assess risk by balancing the property’s value against the borrower’s repayment capacity. Conforming loan limits, set annually by the Federal Housing Finance Agency (FHFA), cap loans eligible for securitization, reducing systemic risk (FHFA, 2023). The 80% loan-to-value (LTV) rule safeguards lenders by minimizing equity exposure. DTI ratios prevent overleveraging, with data showing borrowers exceeding 43% have a 50% higher default risk (Consumer Financial Protection Bureau, 2022). Jumbo loans, accounting for 8% of U.S. originations in 2022 (Mortgage Bankers Association), rely on local market data to avoid overextension. Combining these factors ensures alignment with regulatory standards and lender profitability.