Certified Residential Appraiser Practice Exam

Which of the following represents a valid ratio for loan-to-value (LTV) calculation?

1. 25%

2. 50%

3. 75%

4. 100%

The correct answer is: 75%

The loan-to-value (LTV) ratio is 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 amount of the mortgage by the appraised value of the property. The LTV ratio is a critical factor in determining risk for lenders; a lower LTV typically indicates less risk. In this context, a valid LTV calculation typically ranges from 0% to 100%. When the LTV is at 100%, it means that the loan amount is equal to the property's value, which can occur in certain situations such as 100% financing scenarios. However, this is considered high risk, and lenders may often require additional mortgage insurance or impose other restrictions. A ratio of 75% reflects a common standard in lending practices, as it indicates that the borrower has some equity in the property, which lowers the lender's risk. Options such as 25% and 50% also represent valid LTV ratios, with 25% indicating substantial borrower equity and 50% showing that the borrower is still carrying a significant loan amount compared to the home value. While the choice of 75% is indeed a common and valid LTV ratio, the overall concept