Which statement about the loan-to-value (LTV) ratio is correct?

Which statement about the loan-to-value (LTV) ratio is correct?

• A. LTV = loan amount / appraised collateral value
• B. LTV = equity divided by loan amount
• C. LTV equals net present value of collateral
• D. LTV measures credit risk with debt-to-income ratio

Answer: (A)

LTV measures how much of the collateral’s value is financed with the loan. It is calculated by dividing the loan amount by the appraised value of the collateral and expressing that as a percentage. This makes the statement that defines LTV correctly. The other options mix up different concepts: equity divided by loan amount is not how LTV is defined, net present value of collateral isn’t the LTV, and debt-to-income ratio assesses a borrower's ability to pay rather than how much of the asset’s value is financed. In practice, a higher LTV signals greater lending risk and often leads to higher rates or mortgage insurance requirements.

LTV measures how much of the collateral’s value is financed with the loan. It is calculated by dividing the loan amount by the appraised value of the collateral and expressing that as a percentage. This makes the statement that defines LTV correctly. The other options mix up different concepts: equity divided by loan amount is not how LTV is defined, net present value of collateral isn’t the LTV, and debt-to-income ratio assesses a borrower's ability to pay rather than how much of the asset’s value is financed. In practice, a higher LTV signals greater lending risk and often leads to higher rates or mortgage insurance requirements.