Future Business Leaders of America (FBLA) Business Calculations Practice Test

In order to be calculated, what does the loan-to-value ratio require?

1. The appraised value of the property and loan amount

2. The interest rate and loan length

3. Insurance and property taxes

4. The buyer's credit score

The correct answer is: The appraised value of the property and loan amount

The loan-to-value (LTV) ratio is a crucial financial metric used by lenders to assess risk when approving a mortgage loan. It is specifically calculated by comparing the amount of the loan to the appraised value of the property being purchased. This ratio is important because it helps lenders determine how much equity a borrower has in the property and thus how much risk they are taking on. To calculate the LTV ratio, you divide the loan amount by the appraised value of the property, then multiply by 100 to get a percentage. For example, if the loan amount is $200,000 and the property is appraised at $250,000, the LTV ratio would be (200,000 / 250,000) * 100, which equals 80%. A lower LTV ratio generally indicates a lower risk for the lender, while a higher ratio suggests higher risk. The other answer choices, while they may relate to aspects of mortgage financing, do not pertain directly to the calculation of the loan-to-value ratio. The interest rate and loan length are important for determining monthly payments but are not involved in the LTV calculation. Insurance and property taxes are additional costs associated with home ownership but do not factor into the LTV