A borrower requests a $320,000 first mortgage to purchase a home for $410,000. The appraised value is $400,000. Using the lower of purchase price or appraised value, what is the LTV?
Correct Answer
B) 80%
Why this is correct: For a purchase transaction, the Loan-to-Value (LTV) ratio is calculated using the loan amount divided by the lower of the purchase price or the appraised value. Here, purchase price = $410,000; appraised value = $400,000. The lower is $400,000. Loan amount = $320,000. LTV = ($320,000 / $400,000) * 100% = 80%. Why the other choices are wrong: "75%" is wrong; this would be the LTV if using the purchase price ($320,000 / $410,000 ≈ 78%, not 75%) or an incorrect value. "82%" is wrong; this approximates using the purchase price ($320,000 / $410,000 ≈ 78.05%), but is not exact and not the correct LTV per the rule. "102.5%" is wrong; this would occur if the loan amount were compared to a lower value incorrectly (e.g., $410,000 / $400,000) or if the numbers were reversed. Exam tip: Always use the lower of purchase price or appraised value for LTV in a purchase transaction. For refinances, use the appraised value.
Why This Is the Correct Answer
Why this is correct: For a purchase transaction, the Loan-to-Value (LTV) ratio is calculated using the loan amount divided by the lower of the purchase price or the appraised value. Here, purchase price = $410,000; appraised value = $400,000. The lower is $400,000. Loan amount = $320,000. LTV = ($320,000 / $400,000) * 100% = 80%. Why the other choices are wrong: "75%" is wrong; this would be the LTV if using the purchase price ($320,000 / $410,000 ≈ 78%, not 75%) or an incorrect value. "82%" is wrong; this approximates using the purchase price ($320,000 / $410,000 ≈ 78.05%), but is not exact and not the correct LTV per the rule. "102.5%" is wrong; this would occur if the loan amount were compared to a lower value incorrectly (e.g., $410,000 / $400,000) or if the numbers were reversed. Exam tip: Always use the lower of purchase price or appraised value for LTV in a purchase transaction. For refinances, use the appraised value.
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