Certified Apartment Portfolio Supervisor (CAPS) Practice Exam - Module 2

In the calculation of LTV, which of the following is the correct formula?

1. Property Value / Loan Amount

2. Loan Amount + Property Value

3. Loan Amount / Property Value

4. Property Value - Loan Amount

The correct answer is: Loan Amount / Property Value

The correct formula for calculating Loan-to-Value (LTV) is based on the relationship between the loan amount and the property's value. The LTV ratio is a crucial financial measurement used by lenders to assess the risk associated with a mortgage or a loan against real estate. By dividing the loan amount by the property value, you obtain the proportion of the property's value that is financed through the loan. This ratio is often expressed as a percentage. For example, if the loan amount is $80,000 and the property value is $100,000, the LTV would be 80,000 / 100,000, which equals 0.8 or 80%. A higher LTV indicates a higher risk for lenders, as it suggests that a greater portion of the property’s value is being financed, making it more susceptible to default if the borrower encounters financial difficulties. The other options do not reflect the LTV calculation accurately: - Dividing property value by loan amount does not provide a meaningful measure of the financial risk or leverage. - Adding loan amount to property value or subtracting loan amount from property value does not yield a useful financial ratio and does not represent how much of the property is being financed. This understanding of LTV is