Rhode Island Loan Officer Practice Test

The loan-to-value (LTV) ratio is a financial term that expresses the ratio of a loan amount to the appraised value of the property being purchased or refinanced. It is a key metric used by lenders to assess risk; a lower LTV ratio suggests that a borrower has invested a greater amount of equity in the property, which can make them a more favorable candidate for a loan.

For example, if a property is appraised at $200,000 and the loan amount is $160,000, the LTV ratio would be calculated as $160,000 divided by $200,000, resulting in an LTV of 80%. This means that the borrower is financing 80% of the property's value, with the remaining 20% being covered by their down payment or equity.

Using this definition, it becomes evident why the option that states the ratio of loan amount to the appraised value of the property accurately captures the essence of the LTV ratio. Other options refer to different financial concepts that do not align with the standard definition of LTV in the context of lending. For instance, options discussing closing costs or down payments do not directly relate to the property’s appraised value, which is the fundamental element in calculating L