Which calculation does an underwriter use to determine the loan-to-value ratio?

• A. Loan amount divided by purchase price
• B. Monthly payment divided by annual income
• C. Loan amount divided by borrower’s credit score
• D. Appraised value divided by market value

Answer: (A)

The loan-to-value (LTV) ratio is a critical metric used in mortgage underwriting to assess the risk associated with a loan. It is calculated by dividing the loan amount by the appraised value (or purchase price) of the property being financed. This ratio helps lenders understand how much equity a borrower has in the property compared to the amount they are borrowing.

In this context, the correct calculation involves the loan amount divided by the purchase price, which directly correlates to the proportion of the property's value that is being financed. A higher LTV ratio indicates higher risk for lenders, as it implies the borrower has less equity in the property, while a lower LTV suggests greater borrower equity and, consequently, lower risk.

The other calculations mentioned do not pertain to the loan-to-value ratio. For instance, monthly payments divided by annual income would relate to the debt-to-income ratio, which helps evaluate a borrower’s ability to manage monthly payments rather than the risk related to the value of the property itself. Similarly, dividing the loan amount by the borrower’s credit score does not provide relevant insights into the relative value of the loan against the property’s worth. Lastly, appraised value divided by market value is not an LTV calculation but instead concerns how