A property has an appraised value of $500,000 and a loan amount of $400,000. What is the loan-to-value ratio?
Correct Answer
B) 80%
Loan-to-value ratio = Loan amount ÷ Property value. $400,000 ÷ $500,000 = 0.80 or 80%.
Why This Is the Correct Answer
Option B (80%) is correct because the loan-to-value ratio is calculated by dividing the loan amount by the property's appraised value. Using the formula: $400,000 ÷ $500,000 = 0.80, which converts to 80% when expressed as a percentage. This means the loan covers 80% of the property's value, while the borrower's down payment represents the remaining 20% equity.
Why the Other Options Are Wrong
Option A: 125%
Option A (125%) is incorrect because it represents the inverse calculation (property value ÷ loan amount = $500,000 ÷ $400,000 = 1.25 or 125%), which is not the loan-to-value ratio formula.
Option C: 20%
Option C (20%) is incorrect because it represents the down payment percentage or equity ratio ($100,000 ÷ $500,000 = 20%), not the loan-to-value ratio.
Option D: 1.25%
Option D (1.25%) is incorrect because it appears to be a decimal conversion error, possibly confusing 1.25 (the inverse ratio) with 1.25% as a percentage.
LOAN over VALUE
Remember 'LOAN over VALUE' - literally put the loan amount on top (numerator) and the property value on bottom (denominator). Think of it as 'How much LOAN covers the VALUE' - like a blanket covering a bed.
How to use: When you see LTV questions, immediately visualize the fraction: LOAN (top) ÷ VALUE (bottom). This prevents confusion with inverse calculations or equity ratios.
Exam Tip
Always double-check that your LTV result makes logical sense - it should typically be between 70-95% for most conventional loans, never over 100% for standard purchases.
Common Mistakes to Avoid
- -Calculating the inverse ratio (value ÷ loan)
- -Confusing LTV with equity percentage
- -Forgetting to convert decimal to percentage
Concept Deep Dive
Analysis
The loan-to-value ratio (LTV) is a fundamental financial metric used in real estate lending and appraisal that measures the relationship between the loan amount and the property's appraised value. This ratio is critical for lenders to assess risk, as it indicates how much of the property's value is being financed versus the borrower's equity. A lower LTV ratio represents less risk for the lender because the borrower has more equity in the property. LTV ratios are typically expressed as percentages and are used to determine loan approval, interest rates, and whether private mortgage insurance is required.
Background Knowledge
Loan-to-value ratio is one of the most important risk assessment tools in real estate finance, directly impacting loan approval decisions and terms. Appraisers must understand LTV calculations because their valuations directly affect the ratio and subsequent lending decisions.
Real-World Application
In practice, appraisers must ensure their valuations are accurate because if the appraised value comes in lower than expected, it increases the LTV ratio, potentially causing loan denial or requiring a larger down payment from the borrower.
More Math & Stats Questions
What is the area of a triangular lot with a base of 120 feet and a height of 80 feet?
An irregular lot has the following measurements: Side A = 100', Side B = 150', Side C = 120', Side D = 180'. If the lot can be divided into two rectangles (100' × 150' and 120' × 30'), what is the total area?
A property has a potential gross income of $180,000, vacancy and collection loss of 7%, and operating expenses of $65,000. What is the NOI?
A property generates $120,000 in net operating income and is valued at $1,500,000. What is the capitalization rate?
A building has potential gross income of $180,000, vacancy and collection loss of 8%, and operating expenses of $54,000. What is the net operating income?
People Also Study
Valuation Principles & Procedures
25% of exam
Property Description & Analysis
20% of exam
Market Analysis & Highest/Best Use
15% of exam
USPAP (Ethics & Standards)
15% of exam
Report Writing & Compliance
10% of exam
Related Tools
Previous Question
A property has a replacement cost new of $1,800,000. Physical deterioration is $200,000, functional obsolescence is $75,000, and external obsolescence is $125,000. What is the depreciated value of the improvements?
Next Question
Given the following comparable sales prices: $280,000, $285,000, $285,000, $290,000, $320,000, what is the mode?