California Real Estate Broker ExaminationFinancingMedium
A lender is preparing to offer a loan to a borrower with a 70% loan-to-value (LTV) ratio. The loan amount is $280,000. What is the purchase price of the property?
- A$400,000
- B$476,000
- C$350,000
- D$196,000
Show answer & explanationAnswer & explanation
Correct answer: A. $400,000
The loan-to-value (LTV) ratio is calculated by dividing the loan amount by the property's appraised value or purchase price (whichever is lower). To find the purchase price, divide the loan amount by the LTV ratio: $280,000 / 0.70 = $400,000.
Why the other options are wrong
- B. This calculation incorrectly adds the loan amount to a derived value.
- C. This calculation is incorrect for determining the purchase price from LTV and loan amount.
- D. This would be 70% of the loan amount, not the purchase price.
Loan-to-Value (LTV) Ratio
A financial term used by lenders to express the ratio of a loan to the value of an asset purchased. It is calculated by dividing the loan amount by the property's appraised value or purchase price, whichever is lower.
- Loan Amount / Property Value = LTV
- Higher LTV means more risk for the lender
- Often determines if PMI is required
Memory trick: LTV = Loan Over Value.