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 based on the contract price or the appraised value of the property, choosing the lower of the two to mitigate risk and ensure that the loan is adequately secured.

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

This option is incorrect because while buyer interest can influence property values, lenders specifically base loan amounts on the contract price or appraisal rather than the subjective willingness of a buyer to pay a particular amount.

B) taxable income of the buyer.

This choice is also incorrect as it does not directly relate to the property's value or the terms of the loan. While a buyer's income can impact their ability to qualify for a loan, it is not the basis for determining the loan amount itself.

C) location of the property.

While the location can affect the market value and desirability of a property, it is not the direct basis for the loan amount. Lenders rely on the contract price or appraisal rather than just the geographic location.

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

This option is correct because lenders will assess either the contract price agreed upon by the buyer and seller or the appraised value determined by an independent appraiser, and they will lend based on the lower of the two to protect their investment.

Conclusion

The correct answer is D, as it accurately reflects the standard practice of lenders in determining loan amounts. Options A, B, and C fail to address the specific criteria used by lenders, which focus on ensuring the loan amount is secured against the property's actual market value, thereby reducing financial risk.