Finance
A buyer with excellent credit qualifies for a conventional mortgage. The property appraises for $280,000, but the buyer agrees to pay $295,000. The lender will base the loan amount on:
AThe contract price of $295,000
BThe lower of the appraised value or contract price — $280,000✓ Correct
CThe average of the two amounts — $287,500
DThe higher of the two to maximize the loan
Explanation
Lenders base the loan amount (and LTV ratio) on the lower of the appraised value or the purchase price. If the property appraises below the contract price, the buyer must either renegotiate, pay the difference in cash, or the deal may fall apart. This protects the lender from being over-leveraged.
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