Use a stated property value of $1,000,000 and loan amount of $800,000. What is loan ÷ stated value as a percentage?
Correct Answer
C) 80%
800000÷1000000×100 = 80. Common errors: inverting the ratio (value ÷ loan) gives 125%; reporting the equity share instead of the loan share gives 20%; dividing by value plus loan gives 44%.
Why This Is the Correct Answer
Option C is correct because the loan-to-value ratio is the loan divided by the value: $800,000 ÷ $1,000,000 = 0.80, and 0.80 × 100 = 80%. This matches the standard definition of dividing the extension of credit by the market value of the property.
Why the Other Options Are Wrong
Option A: 20%
Option A, 20%, is the equity share rather than the loan share: ($1,000,000 − $800,000) ÷ $1,000,000 × 100 = 20%. The question asks for loan ÷ value, which is $800,000 ÷ $1,000,000 × 100 = 80%.
Option B: 44%
Option B, 44%, comes from dividing the loan by value plus loan: $800,000 ÷ ($1,000,000 + $800,000) × 100 ≈ 44%. The correct denominator is the value alone, giving $800,000 ÷ $1,000,000 × 100 = 80%.
Option D: 125%
Option D, 125%, inverts the ratio: $1,000,000 ÷ $800,000 × 100 = 125%. Loan-to-value puts the loan on top, so the answer is $800,000 ÷ $1,000,000 × 100 = 80%.
Loan over value
Say the name in order: Loan-To-Value means Loan on top, Value on the bottom. The equity share is whatever is left over.
How to use: Use this whenever you see an LTV question to set up the fraction before calculating.
Exam Tip
Check that your LTV answer is below 100% when the loan is smaller than the value; a result above 100% usually means you flipped the ratio.
Common Mistakes to Avoid
- -Dividing the value by the loan and reporting 125%
- -Reporting the 20% equity share instead of the loan share
- -Adding loan and value together in the denominator
Concept Deep Dive
Analysis
This question tests the loan-to-value ratio, which divides the loan amount by the property value. The key is to keep the loan in the numerator and the value in the denominator, then convert the decimal to a percentage. Here $800,000 divided by $1,000,000 is 0.80, or 80%.
Background Knowledge
The loan-to-value ratio compares the amount of credit extended to the market value of the collateral property. Lenders use it to gauge how much of the property value is financed and how much equity cushion remains. The remaining share, one minus the LTV, represents the owner's equity position.
Real-World Application
An appraiser delivers a $1,000,000 market value on a property securing an $800,000 loan request. The lender's underwriter divides the loan by the appraised value to confirm an 80% LTV before approving the credit.
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