FinanceIntermediateAlaska Exam

The 'loan-to-value ratio' (LTV) is important to lenders because a lower LTV indicates:

AGreater borrower risk

BLess equity protecting the lender against default losses, under standard practice

CMore borrower equity, providing a larger cushion against losses in foreclosureCorrect

DA higher probability of borrower default

Why More borrower equity, providing a larger cushion against losses in foreclosure Is Correct

Answer C: More borrower equity, providing a larger cushion against losses in foreclosure

A lower LTV means the borrower has more equity in the property. This protects the lender because even if the borrower defaults and the property must be sold at a discount, the lender is more likely to recover the full loan amount.

Exam Tip: Finance

Finance questions often involve calculations. Master the T-bar method, understand the difference between conventional and government-backed loans, and know key ratios like LTV and DTI.

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Key Terms to Know

Loan-to-Value Ratio (LTV)

The ratio of a mortgage loan amount to the appraised value or purchase price of a property, expressed as a percentage.

Debt-to-Income Ratio (DTI)

A lender's measure of a borrower's monthly debt obligations relative to their gross monthly income, used to evaluate loan eligibility.

Discount Points

Prepaid interest paid to a lender at closing to reduce the mortgage interest rate, with each point equal to 1% of the loan amount.

Private Mortgage Insurance (PMI)

Insurance required by lenders on conventional loans with less than 20% down payment, protecting the lender — not the borrower — against default.

Math Concepts

Loan-to-Value Ratio Equity Calculation Profit & Loss

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