What would a lender typically base the loan-to-value ratio on?

A lender typically bases the loan-to-value ratio (LTV) on the appraised value or sales price of the property, with a preference for the lower of the two. This means that if the appraised value is lower than the sales price, the lender will use the appraised value to calculate the LTV because it reflects a more conservative estimate of the property's worth.

The LTV ratio is crucial because it helps lenders evaluate the risk of the loan; a higher LTV indicates more risk as it means the borrower is financing a larger portion of the property's value. By using the lower amount, lenders protect their investment in case property values decrease and ensure that borrowers have a reasonable equity stake in the property.

Understanding this helps in real estate transactions and financing decisions, as the LTV ratio directly affects loan terms like interest rates and required mortgage insurance. In contrast, the other options are less applicable; they either suggest being based on a higher valuation or irrelevant factors that don’t influence the LTV directly.