Question 69

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

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

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

While the buyer's willingness to pay can reflect market demand, it does not directly determine the loan amount approved by the lender. Lenders focus on objective criteria such as the appraised value or contract price rather than subjective buyer readiness.

B) taxable income of the buyer

The taxable income of the borrower is relevant for assessing their ability to repay the loan, but it does not directly influence the amount of the loan itself. The loan amount is primarily determined by the property’s value and the terms of the purchase agreement.

C) location of the property

Although the location can affect the appraised value of a property, it is not a direct factor in determining the loan amount. Lenders focus on the contract price or appraised value rather than location specifics when establishing loan limits.

D) contract price or appraised value, whichever is lower

This option accurately reflects the common practice among lenders, who will offer a loan amount based on the lesser of the contract price or the appraised value to protect their investment. This ensures that the loan amount aligns with the market value of the property.

Conclusion

The correct answer is option D, as it represents the standard practice of lenders in determining loan amounts. All other options either misinterpret the criteria lenders use or focus on factors that do not directly dictate the loan amount, thereby reinforcing why option D is the most accurate choice.