Real Estate LTV, Down Payment, and Cash-to-Close Practice

A buyer agrees to pay $400,000 for a property that appraises at $380,000. A fictional lender will lend up to 80% of the lower figure. Does the buyer need an $80,000 down payment?

No. Under those stated terms, the maximum loan is $304,000 and the purchase-price gap is $96,000. The apparent shortcut, “80% loan means 20% down,” fails because the loan and the down-payment percentage are being compared with different amounts.

Real estate finance questions become easier to check when you keep four figures separate: price, value used for lending, loan amount, and cash still due at closing. This guide is educational exam practice, not a recommendation about borrowing or a statement that a particular loan program is available.

Loan-to-value formula for real estate exam questions

The CFPB defines loan-to-value as a comparison of financing with the property's appraised value. For purchase-money transactions covered by its selling guide, Fannie Mae uses the lower of sale price and current appraised value. The same page identifies exceptions and different treatment for other transaction types.

For an exam calculation, first identify the basis the question requires. Then write:

LTV = loan amount / stated lending value × 100%.

When the maximum ratio is given:

Maximum loan = stated lending value × maximum LTV expressed as a decimal.

For the simplified purchases below, assume one first mortgage, no financed fees, no subordinate financing, and no price changes. The buyer's contribution toward the purchase price is then price minus loan. Closing costs and prepaid deposits are separate.

Example 1: when the familiar shortcut works

Given: Price and appraisal are both $360,000. The buyer makes a $72,000 contribution toward the purchase price and finances the rest.

Loan amount = $360,000 − $72,000 = $288,000.

LTV = $288,000 / $360,000 × 100% = 80%.

The contribution is $72,000 / $360,000 = 20% of the price. Here 80% and 20% sum to 100% because both use the same $360,000 basis. That is an outcome of the facts, not an independent rule for every purchase.

A choice of 25% would come from dividing $72,000 by $288,000. That compares the contribution with the loan, not with the price.

Low appraisal example: calculate the loan before the down payment

Given: Price is $400,000, appraisal is $380,000, and the hypothetical loan maximum is 80% of the lower amount. Assume the price stays unchanged and all other loan conditions are satisfied.

The lending basis is $380,000. Maximum loan = $380,000 × 0.80 = $304,000.

Purchase-price contribution = $400,000 − $304,000 = $96,000. As a share of the price, that is $96,000 / $400,000 = 24%.

An alternative check explains where the money went:

• Twenty percent of the $380,000 lending basis is $76,000.
• The price exceeds that basis by $20,000.
• Together: $76,000 + $20,000 = $96,000.

Do not multiply the $20,000 appraisal gap by 20%. In this exercise, none of that gap is financed by the calculated loan.

Does a higher appraisal increase the maximum loan?

Change only the appraisal in Example 2 to $430,000. The fictional lender still uses the lower of price and appraisal.

The basis becomes the $400,000 price, not $430,000. Maximum loan = $400,000 × 0.80 = $320,000. The remaining purchase-price contribution is $80,000.

The $30,000 difference between price and appraisal is not a cash payment from the lender. Nor does an appraisal by itself prove the buyer has liquid funds available for closing.

These two examples belong together: a low appraisal can reduce the lending basis under the stated rule, while a high appraisal does not raise it above the sale price under that same rule.

Cash-to-close example: subtract the deposit only once

Return to Example 2, where the purchase-price contribution was $96,000. Now add these facts:

Cash still due = $96,000 + $8,000 − $12,000 − $3,000 = $89,000.

The $12,000 deposit did not lower the purchase price or increase the loan. It reduced the amount the buyer still had to bring because that portion had already been paid. The seller credit offsets an allowed expense in this example; it is not a promise that every program accepts that credit.

The CFPB's Closing Disclosure explainer distinguishes down payment, closing costs, deposits, credits, and cash to close. Use that separation rather than calling all four figures “the down payment.”

Example 5: the ratio can change without a new loan

Given: A current mortgage balance is $240,000. For this exercise, calculate current LTV against a stated current property value of $320,000.

$240,000 / $320,000 = 75%.

If the stated value instead becomes $300,000 and the balance remains $240,000, the ratio is 80%. The numerator did not change; the denominator did.

This is arithmetic about a supplied balance and valuation. It does not determine mortgage-insurance cancellation eligibility, an available refinance, or a lender's underwriting decision. Those questions require additional program rules and facts.

Name the quantity before reaching for the calculator

For two mortgages, a question may ask for a combined ratio rather than first-mortgage LTV. Do not silently add a second loan to the numerator of a question asking only about the first. Obtain the applicable definition before calculating.

Likewise, a requested exam rounding method is not necessarily a lender's delivery convention. Fannie Mae's cited guidance has its own rounding instructions. The exercises here use exact arithmetic or explicitly requested decimal rounding, not an unstated underwriting convention.

LTV and cash-to-close practice questions

1. A loan is $270,000 and the problem's lending basis is $360,000. What is LTV?

2. Price is $360,000, appraisal is $340,000, and the fictional lender's limit is 85% of the lower value. What are the maximum loan and the buyer's contribution toward price?

3. Use Question 2. Add $7,000 in buyer closing costs. The buyer has a credited $9,000 deposit and a permitted $2,000 seller credit. What cash remains due?

Answers and checks

1: $270,000 / $360,000 = 75%. The answer is not 133.33%; that reverses the ratio.

2: $340,000 × 0.85 = $289,000. Contribution = $360,000 − $289,000 = $71,000. The contribution is greater than 15% of the price because the loan basis is lower than the price.

3: $71,000 + $7,000 − $9,000 − $2,000 = $67,000. Do not subtract the deposit twice.

LTV and down-payment questions to check before answering

Is 80% LTV always the same as a 20% down payment?

Not necessarily. That shortcut works when the loan basis equals the purchase price and there are no other financing complications. If a problem specifies the lower of price and appraisal, calculate the allowed loan from that lower amount first. Then subtract the loan from the price. The Fannie Mae purchase-LTV rule supports that basis for transactions within its scope; it is not a claim that every lending program has identical rules.

Is earnest money an additional down payment?

In these examples, the deposit is part of the buyer's funds already paid, not a second contribution to add at closing. The CFPB explanation of cash to close separates the total transaction charges from money already paid and credits. Keep a column marked "already paid" so the same deposit does not get deducted twice.

What is the difference between closing costs and cash to close?

Closing costs are one component. Cash still due can also include the remaining buyer contribution and settlement adjustments. In a practice problem, list every supplied item, assign it to one place in the calculation, and leave out charges the problem never supplied.

Can you calculate LTV without an appraisal?

You need the value basis specified by the problem. If the question provides that basis directly, you can calculate the ratio without inventing another appraisal. If both price and appraisal are given, explain which one the rule tells you to use before dividing.

Connect the numbers to the rest of the transaction

An appraisal value and a sale price answer different questions. The comparable-sales adjustment guide explains the valuation side. Proration practice explains another source of closing adjustments.

Continue with Real Estate Finance, or take the general real estate practice test. Before answering a finance question, write the requested quantity and circle the denominator. That small written distinction is what these examples train.