Minnesota State Real Estate Practice Test

How is the Loan-To-Value (LTV) ratio calculated?

1. As the loan amount divided by the total property value

2. As the loan amount divided by the sales price

3. As the loan amount divided by the loan term

4. As the loan amount plus other fees divided by property value

The correct answer is: As the loan amount divided by the total property value

The Loan-To-Value (LTV) ratio is a key financial metric used in real estate transactions to assess risk in a mortgage loan. It is calculated by taking the loan amount and dividing it by the appraised value (or sometimes the sales price) of the property. The formula can be expressed as: LTV = Loan Amount / Property Value Choosing the loan amount divided by the total property value accurately reflects the proportion of the property’s value that is being financed. A higher LTV indicates more risk for lenders, as it suggests a smaller equity cushion if the property value declines. This calculation helps lenders determine how much of the property they are financing compared to its worth. The other answer options involve calculations that do not accurately represent the standard LTV definition. For instance, dividing the loan amount by the sales price does not consider appraised value, while calculating the loan amount divided by the loan term or including other fees would stray from the established calculation for LTV, leading to potentially misleading interpretations of a borrower's risk profile.