Tennessee Realtor State Practice Exam

What value would a lender typically use to calculate the loan-to-value ratio?

1. The higher of the sales price or appraised value

2. The investor's offer price

3. The lower of the sales price or appraised value

4. Market value

The correct answer is: The lower of the sales price or appraised value

A lender typically uses the lower of the sales price or appraised value to calculate the loan-to-value (LTV) ratio, as this method provides a conservative estimate of value that helps to mitigate the lender's risk. LTV is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased. When a property is being financed, the lender wants to ensure that the amount being loaned is appropriately secured by the value of the property. If a property is appraised at a value lower than its sales price, the lender may be hesitant to finance the full sales price because it suggests that the buyer is overpaying, which could pose a risk if the borrower defaults on the loan. Therefore, using the lower value ensures that the lender has a sufficient buffer in the event of a foreclosure or decline in property value. This approach is in line with prudent lending practices, as it helps both the lender and the borrower understand the true value of the property in relation to the mortgage being issued.