Using the stated $500,000 property value as the denominator and a loan of $375,000, what is the loan-to-value ratio?
Correct Answer
C) 75%
375000÷500000×100 = 75. Common errors: inverting the ratio (value ÷ loan) gives 133%; reporting the equity share instead of the loan share gives 25%; dividing by value plus loan gives 43%.
Why This Is the Correct Answer
Option C is correct because $375,000 / $500,000 x 100 = 75%. The loan is the numerator and the stated property value is the denominator. The remaining 25% represents equity.
Why the Other Options Are Wrong
Option A: 25%
Option A is wrong because 25% is the equity share, not the loan share: ($500,000 - $375,000) / $500,000 x 100 = 25%. The LTV is $375,000 / $500,000 x 100 = 75%.
Option B: 43%
Option B is wrong because 43% comes from dividing the loan by value plus loan: $375,000 / ($500,000 + $375,000) x 100 = 43%. The denominator is the property value alone, giving 75%.
Option D: 133%
Option D is wrong because 133% comes from inverting the ratio: $500,000 / $375,000 x 100 = 133%. LTV divides loan by value: $375,000 / $500,000 x 100 = 75%.
Loan on top
LTV reads in order: Loan To Value, so the loan goes on top and value goes underneath.
How to use: Use the order of the letters to set up the fraction correctly.
Exam Tip
An LTV above 100% means the loan exceeds value, which should make you double-check for an inverted ratio. Also distinguish LTV from the equity share.
Common Mistakes to Avoid
- -Dividing value by loan
- -Reporting the equity percentage as LTV
- -Adding loan and value in the denominator
Concept Deep Dive
Analysis
This question tests the loan-to-value ratio. LTV is the loan amount divided by property value. Here $375,000 / $500,000 = 0.75, or 75%.
Background Knowledge
The loan-to-value ratio is derived by dividing the loan amount by the market value of the property. It is a key lending measure and also the mortgage weight, M, in band-of-investment calculations. One minus the LTV is the equity ratio.
Real-World Application
A lender orders an appraisal on a $500,000 home and plans a $375,000 loan. Once the appraised value supports $500,000, the loan is at 75% LTV and fits the lender's guidelines.
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