California Real Estate SalespersonFinancingMedium
A property appraises for $400,000, and the buyer's lender approves a loan of $320,000 to finance the purchase. What is the loan-to-value (LTV) ratio?
- A90%
- B96%
- C80%
- D75%
Show answer & explanationAnswer & explanation
Correct answer: C. 80%
LTV is calculated by dividing the loan amount by the property's appraised value (or sale price, whichever is lower): $320,000 ÷ $400,000 = 0.80, or 80%.
Why the other options are wrong
- A. 90% would require a loan of $360,000.
- B. 96% would require a loan of $384,000.
- D. 75% would require a loan of $300,000, not $320,000.
Loan-to-Value (LTV) Ratio
The ratio of the loan amount to the appraised value or purchase price of a property, expressed as a percentage.
- Formula: Loan Amount ÷ Property Value
- Higher LTV means less borrower equity and higher lender risk
- Loans above 80% LTV often require private mortgage insurance
Memory trick: Loan divided by value tells the lender how much skin you have in the game.