How is the loan-to-value (LTV) ratio calculated when a lender evaluates a mortgage application?
Correct Answer
B) Loan amount divided by the lesser of appraised value or purchase price
LTV is calculated by dividing the loan amount by the lesser of the property's appraised value or the purchase price, expressed as a percentage. Lenders use the lower of the two figures to protect against lending more than the property is worth. A higher LTV represents greater risk to the lender; borrowers with an LTV above 80% on conventional loans are typically required to pay private mortgage insurance (PMI).
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