Using the stated $500,000 property value as the denominator and a loan of $400,000, what is the loan-to-value ratio?
Correct Answer
C) 80%
400000÷500000×100 = 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 loan-to-value equals the loan divided by the value: $400,000 ÷ $500,000 × 100 = 80%. The loan is the numerator and the stated value is the denominator.
Why the Other Options Are Wrong
Option A: 20%
Option A, 20%, is the equity share: ($500,000 − $400,000) ÷ $500,000 = 20%. The question asks for the loan share, which is $400,000 ÷ $500,000 = 80%.
Option B: 44%
Option B, 44%, results from dividing the loan by value plus loan: $400,000 ÷ $900,000 ≈ 44%. The denominator is the $500,000 value alone, giving 80%.
Option D: 125%
Option D, 125%, inverts the ratio: $500,000 ÷ $400,000 = 125%. Loan-to-value puts the loan on top, giving $400,000 ÷ $500,000 = 80%.
Loan on top
Read L-T-V left to right: Loan goes over Value. A normal loan gives a result below 100%.
How to use: Use this reading order to set up the fraction before dividing.
Exam Tip
If your LTV exceeds 100% on a typical loan, you have probably inverted the fraction.
Common Mistakes to Avoid
- -Dividing value by loan
- -Reporting the equity percentage
- -Adding loan and value 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 stem fixes the $500,000 value as the denominator, so the calculation is $400,000 ÷ $500,000.
Background Knowledge
Loan-to-value is derived by dividing the extension of credit by the market value of the property. It measures the lender's share of value, and the remainder is the equity share.
Real-World Application
A lender orders an appraisal on a duplex supporting a $500,000 value, and the borrower requests a $400,000 loan. The resulting 80% loan-to-value is compared with the lender's underwriting limits.
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