PSI Virginia Real Estate Practice Exam

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Prepare for the PSI Virginia Real Estate Exam. Study with flashcards and multiple choice questions, each question has hints and explanations. Get ready for your exam success!

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The Loan to Value (LTV) ratio measures what aspect of a mortgage?

The total amount borrowed
The percentage of the price being financed
The buyer’s credit score
The interest rate applied to the loan

The correct answer is: The percentage of the price being financed

The Loan to Value (LTV) ratio is a critical measure in the context of mortgage lending, as it reflects the relationship between the amount of the loan and the appraised value or purchase price of the property. Specifically, the LTV ratio is calculated by dividing the loan amount by the property value, and then multiplying by 100 to get a percentage. When a lender considers the LTV, they assess how much of the property's value is being financed compared to how much equity the borrower is contributing at the outset. A lower LTV ratio often indicates a lower risk to the lender, as the buyer has more equity in the property from the start. Conversely, a higher LTV ratio suggests that the buyer is financing a larger portion of the property's cost, which might present more risk to the lender. This ratio is particularly significant in determining the terms of the mortgage, such as whether private mortgage insurance (PMI) will be required and what interest rates might be offered. Therefore, stating that the LTV measures the percentage of the price being financed directly aligns with its function in the financing process.