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Question 1
A borrower purchases a home appraised at $250,000 and makes a $50,000 down payment. What is the loan-to-value (LTV) ratio?
Answer: The LTV is 80%. The loan amount is $200,000 ($250,000 − $50,000), and LTV = loan amount ÷ appraised value = $200,000 ÷ $250,000 = 0.80 or 80%.
Question 2
A property appraises for $180,000 but the purchase price is $190,000. Which value is used to calculate LTV, and why?
Answer: The lower of the two values — the appraised value of $180,000 — is used to calculate LTV. Lenders always use the lesser of the appraised value or purchase price to determine LTV.
Question 3
A borrower wants a conventional loan with no PMI requirement. What maximum LTV must the loan not exceed?
Answer: The LTV must not exceed 80%. Conventional loans with an LTV above 80% generally require private mortgage insurance (PMI).
Question 4
A borrower has a gross monthly income of $6,000 and total monthly debt payments of $1,800, including the proposed housing payment. What is the back-end DTI ratio?
Answer: The back-end DTI is 30%. DTI = total monthly debts ÷ gross monthly income = $1,800 ÷ $6,000 = 0.30 or 30%.
Question 5
What is the difference between the front-end (housing) DTI ratio and the back-end (total) DTI ratio?
Answer: The front-end DTI includes only housing expenses (PITI) divided by gross monthly income. The back-end DTI includes all recurring monthly debts (housing plus installment and revolving debts) divided by gross monthly income.