Question 88

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 by considering the contract price or the appraised value of the property, selecting the lower of the two as the basis for the loan amount.

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

This option is incorrect because the loan amount is not solely based on what a buyer is willing to pay. It is influenced by objective assessments such as the appraised value and the contract price, which provide a standardized basis for the lender's decision.

B) taxable income of the buyer.

This choice does not accurately reflect how lenders determine loan amounts. While a buyer's income is a factor in assessing creditworthiness and repayment capacity, it does not directly establish the loan amount which relies more on property valuation.

C) location of the property.

While the location of the property can affect its value and marketability, it is not the primary factor in determining the loan amount. Lenders focus on the contract price and the appraised value instead of geographical considerations alone.

D) contract price or appraised value, whichever is lower.

This option is correct as lenders use either the contract price or the appraised value to set the loan amount, ensuring that they do not lend more than the property's worth as determined by these two measures.

Conclusion

The correct answer is D because it reflects the standard lending practice of assessing the lower of the contract price or the appraised value to mitigate risk. Options A, B, and C fail to capture the fundamental rationale behind establishing a loan amount, which is rooted in objective property valuations rather than subjective buyer willingness or income levels.