The loan-to-value ratio (LTV) is calculated as:
Correct Answer
B) Loan amount divided by the lesser of appraised value or purchase price
LTV = Loan Amount ÷ Lesser of Appraised Value or Purchase Price. Lenders use the lower of the two figures — appraised value or purchase price — to minimize their risk exposure. For example, if a home is purchased for $200,000 but appraised at $190,000, the lender bases the LTV on $190,000. A higher LTV indicates greater lender risk and typically triggers a requirement for private mortgage insurance (PMI).
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