Finance
A lender requires a borrower to get 'private mortgage insurance' (PMI) because the LTV is 90%. If the home value drops 5% after purchase, the LTV becomes:
A85%
B95%
CMore than 90% — the LTV increases as values fall✓ Correct
DThe LTV stays the same
Explanation
When property value falls, the LTV ratio increases because the loan amount stays the same (roughly) but the value (denominator) decreases. A 5% value drop on a 90% LTV loan would push the LTV higher, toward ~95%.
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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.
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.
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 PointsPrepaid interest paid to a lender at closing to reduce the mortgage interest rate, with each point equal to 1% of the loan amount.
Math Concepts
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