McKissock Basic Appraisal Principles Practice Test

The lender looks at how much is being borrowed compared to what the property is worth. This relationship is the loan-to-value ratio, or LTV. It is calculated by dividing the loan amount by the property's value, using either the appraised value or the purchase price—whichever is lower. Expressed as a percentage, the LTV shows how much of the property’s value is being financed.

For example, if you borrow $300,000 and the property’s appraised value is $350,000, the LTV would be 300,000 ÷ 350,000 = 0.857, or 85%. If the purchase price is lower, say $320,000, you would use that lower amount in the denominator, giving 300,000 ÷ 320,000 = 0.938, or 93.75%. The key idea is that the ratio compares the loan amount to the property’s value, not to monthly payments or the down payment.