Use a stated property value of $800,000 and loan amount of $600,000. What is loan ÷ stated value as a percentage?
Correct Answer
C) 75%
600000÷800000×100 = 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 $600,000 / $800,000 x 100 = 75%. Loan-to-value is derived by dividing the loan amount by the property value. The question specifies the stated value as the denominator.
Why the Other Options Are Wrong
Option A: 25%
Option A, 25%, reports the equity share instead of the loan share: ($800,000 - $600,000) / $800,000 x 100 = 25%. The loan share is $600,000 / $800,000 = 75%.
Option B: 43%
Option B, 43%, comes from dividing by value plus loan: $600,000 / ($800,000 + $600,000) x 100 = about 43%. The correct denominator is the stated value alone, giving 75%.
Option D: 133%
Option D, 133%, inverts the ratio by dividing value by loan: $800,000 / $600,000 x 100 = about 133%. Loan-to-value puts the loan on top: $600,000 / $800,000 = 75%.
L over V
The name gives the order: Loan to Value means loan on top, value on the bottom.
How to use: Use this to set up any loan-to-value calculation.
Exam Tip
A loan-to-value ratio above 100% means the loan exceeds value, so check that your answer makes sense for the facts given.
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 computing a loan-to-value ratio. The loan amount goes on top and the stated property value on the bottom. The distractors come from inverting the ratio, reporting equity instead of the loan, or using the wrong denominator.
Background Knowledge
The loan-to-value ratio compares the amount of debt to the value of the property securing it. The remaining share of value is the equity position, so loan-to-value plus the equity share equals 100%.
Real-World Application
A lender plans a $600,000 loan on a property appraised at $800,000. The appraised value produces a 75% loan-to-value ratio, which the lender compares with its underwriting limits.
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