California Nationwide Multistate Licensing System & Registry (NMLS) Practice Test

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What impact does high Loan-To-Value (LTV) ratio have on a mortgage?

It usually results in a lower interest rate.

It indicates a potential for lower loan approval rates.

A high Loan-To-Value (LTV) ratio indicates that the borrower is financing a large portion of the property's value with debt. This situation generally reflects a higher risk for lenders, as it means the borrower has little equity in the property. Consequently, lenders may view borrowers with high LTV ratios as being more susceptible to default, especially if property values decline.

As a result, a high LTV ratio typically correlates with increased scrutiny during the loan approval process, which can lead to lower loan approval rates. Lenders may impose stricter requirements or may be less inclined to approve loans where the LTV is high because of the associated risks.

This is why stating that a high LTV ratio indicates a potential for lower loan approval rates is accurate; lenders are more cautious when the risk profile of the loan is elevated.

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It suggests a higher credit score for the borrower.

It decreases insurance requirements.

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