Question 69

The loan amount established by a lender is normally based on the contract price or appraised value, whichever is lower.

Lenders typically determine the loan amount based on the contract price or the appraised value of the property, using the lower of the two to mitigate risk.

A) amount that a ready, willing, and able buyer will pay

This option is incorrect because while market demand influences property values, lenders do not base loan amounts solely on what a buyer is willing to pay. The assessment of value must consider objective measures like the appraised value or contract price.

B) taxable income of the buyer

Although a buyer's taxable income may influence their ability to repay a loan, it is not the primary determinant of the loan amount itself. Lenders primarily focus on property values rather than the buyer's income when establishing loan limits.

C) location of the property

While the location of the property can affect its market value and desirability, it is not the direct basis for establishing the loan amount. Loan amounts are primarily determined by the contract price or appraised value rather than just the location.

D) contract price or appraised value, whichever is lower

This option is correct as lenders assess the risk associated with a loan by comparing the contract price to the appraised value. They will typically lend an amount that does not exceed the lower of these two figures to protect their investment.

Conclusion

The correct answer is definitive because it aligns with standard lending practices where the loan amount is limited to the lowest value between the contract price and the appraised value. Other options fail to properly reflect the criteria lenders use, focusing instead on subjective or indirect factors that do not directly relate to the loan amount determination.