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

What does a lower Loan to Value (LTV) indicate regarding risk perception by lenders?

1. Higher risk

2. Lower risk

3. Equal risk

4. No effect on risk

The correct answer is: Lower risk

A lower Loan to Value (LTV) ratio indicates lower risk for lenders because it reflects a greater equity stake that the borrower has in the property. When the LTV is low, it means that the borrower is financing a smaller portion of the property's value through a loan, which suggests that they have invested more of their own funds into the purchase. This equity can serve as a buffer for the lender in case the borrower defaults, as it indicates that the property is less likely to be underwater (where the loan balance exceeds the property value). In addition, a lower LTV often implies that the borrower is financially responsible and has a better creditworthiness, further reducing the perceived risk for the lender. In contrast, a higher LTV typically signals higher risk because the borrower is reliant on borrowed funds for a significant portion of the property's value, which can lead to greater losses for the lender if the borrower defaults and the property value decreases.