Finance
What does 'loan-to-value ratio' (LTV) measure?
AThe ratio of the loan amount to the borrower's annual income
BThe ratio of the loan amount to the appraised value of the property✓ Correct
CThe ratio of debt payments to monthly income
DThe ratio of equity to total debt
Explanation
Loan-to-value ratio (LTV) is calculated by dividing the loan amount by the appraised value of the property. A lower LTV generally results in better loan terms and may eliminate the need for private mortgage insurance (PMI).
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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.
Pre-ApprovalA lender's conditional commitment to loan a specific amount to a borrower, based on verified income, credit, and assets.
Math Concepts
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