Definition
The loan amount in real estate is the total principal sum a lender agrees to advance to a borrower to buy or refinance a property. It’s the actual money borrowed at origination — excluding future interest — and is the base figure used to calculate monthly payments and payoff schedules.
How the loan amount is calculated
Simple formula: Loan Amount = Purchase Price − Down Payment ± Any Financed Closing Costs or Fees. For example, a $300,000 home with a 20% down payment ($60,000) yields a $240,000 loan amount. If the borrower rolls $5,000 of closing costs into the loan, the financed loan amount becomes $245,000.
Key factors that affect loan amount
- Property value and appraisal: Lenders typically base financing on a percentage of the appraised value, not just the agreed purchase price.
- Loan-to-Value (LTV) ratio: LTV (loan amount ÷ property value) determines maximum loan size and whether mortgage insurance or higher rates are required.
- Down payment: Larger down payments reduce the loan amount and can lower rate/insurance requirements.
- Loan type: Conventional, FHA, VA and commercial loans have different maximums, LTV limits and rules about what can be financed.
- Borrower creditworthiness: Credit score, income and debt-to-income ratio influence how much a lender is willing to lend and on what terms.
- Financed costs: Some mortgages allow rolling closing costs or mortgage insurance into the loan amount.
Real-world examples
- Purchase price $285,000 with a 10% down payment ($28,500) → loan amount = $256,500.
- Home purchased for $300,000, 20% down ($60,000) → loan amount = $240,000; monthly payment then depends on interest rate and term.
- Commercial loan: a business borrows $200,000 — that principal is the loan amount and is repaid per the commercial loan’s schedule, which may include balloon payments.
- Some mortgages add permitted closing costs to the loan at closing, increasing the loan amount above purchase price minus down payment.
Why loan amount matters
The loan amount determines your principal balance on day one and directly affects monthly payments, total interest paid over the life of the loan, and your LTV ratio (which affects rates and eligibility). Understanding the loan amount helps buyers budget, compare lenders, and plan refinance or payoff strategies.
Common confusions
- Loan amount vs. purchase price: They’re not always the same. Purchase price minus down payment usually equals the loan amount unless closing costs or credits change that number.
- Loan amount vs. total cost: The loan amount is principal only — interest, fees and insurance increase the total amount you’ll pay over time.
- Financed fees: Not all loans allow fees or taxes to be added to the loan amount; check your loan type and lender rules.
Quick tips for borrowers
- Increase your down payment to lower the loan amount and monthly payments.
- Request a loan estimate from lenders to see the precise loan amount and whether any costs are being financed.
- Compare how different loan types and LTV limits affect the maximum loan amount you can get.
- Factor in whether mortgage insurance or financed closing costs will raise your principal balance.
Bottom line
The loan amount is the principal sum a lender advances to you for a property purchase or refinance. Knowing how it’s computed and what affects it—appraisal, down payment, LTV, loan type and borrower qualifications—lets you accurately estimate payments, evaluate affordability, and choose the best financing option for your needs.
