Final answer:
When the loan amount is divided by the lower of the purchase price or appraised value, it determines the loan-to-value ratio (LTV) and helps lenders assess the risk of a loan.
Step-by-step explanation:
When the loan amount is divided by the lower of the purchase price or appraised value of a property, it helps determine the loan-to-value ratio (LTV). The LTV ratio is used by lenders to assess the risk of a loan. If the LTV ratio is high, it means the borrower has a higher loan amount compared to the value of the property, which can be risky for the lender.
For example:
- If the loan amount is $200,000 and the lower value between the purchase price and appraised value is $250,000, the LTV ratio would be 80% ($200,000 / $250,000).
- If the loan amount is $200,000 and the lower value is $150,000, the LTV ratio would be 133.33% ($200,000 / $150,000).