LTV is defined as the ratio of the loan amount to the appraised value or purchase price, whichever is lower.

LTV is defined as the ratio of the loan amount to the appraised value or purchase price, whichever is lower.

• A. The loan amount divided by the appraised value or purchase price (whichever is lower).
• B. The appraised value divided by the loan amount.
• C. The down payment divided by the loan amount.
• D. The borrower's credit score divided by the loan amount.

Answer: (A)

LTV tells you how much of the property’s value you’re borrowing. It’s calculated by taking the loan amount and dividing it by the value used to secure the loan. Lenders use the lower of the appraised value or the purchase price in that denominator because it provides a conservative, risk-aware measure of how much collateral backs the loan. If the property is worth less than the price paid, using the lower value prevents overstating how much the loan is covered by collateral, which protects the lender. For example, borrow $320,000 and the appraisal comes in at $350,000; LTV is about 91%. If the appraisal is $340,000 (lower than the price), the LTV becomes about 94%. The other ratios described—such as value divided by loan amount, or using the down payment or a credit score—don’t measure how much of the property’s value is financed, so they aren’t LTV.

LTV tells you how much of the property’s value you’re borrowing. It’s calculated by taking the loan amount and dividing it by the value used to secure the loan. Lenders use the lower of the appraised value or the purchase price in that denominator because it provides a conservative, risk-aware measure of how much collateral backs the loan. If the property is worth less than the price paid, using the lower value prevents overstating how much the loan is covered by collateral, which protects the lender. For example, borrow $320,000 and the appraisal comes in at $350,000; LTV is about 91%. If the appraisal is $340,000 (lower than the price), the LTV becomes about 94%. The other ratios described—such as value divided by loan amount, or using the down payment or a credit score—don’t measure how much of the property’s value is financed, so they aren’t LTV.