Certified Financial Planner (CFP) Exam 2026 – 400 Free Practice Questions to Pass the Exam

The concept of a maximum loan-to-value (LTV) ratio of 80% means that the lender is willing to finance up to 80% of the home's appraised value or purchase price, whichever is lower. This implies that the borrower must provide the remaining 20% as a down payment.

To understand the implication for the down payment, consider a home purchase price of $100,000. An 80% LTV allows the buyer to borrow $80,000, which indicates that the buyer must pay the difference, which in this scenario would be $20,000, as a down payment. Therefore, the requirement is for the borrower to put down at least 20% of the home's value to meet the maximum LTV ratio.

Minimum down payment refers to the smallest amount the lender requires to secure the loan while allowing for credit risk management; in this case, a minimum down payment of $20,000 is derived from the maximum LTV constraint.

This understanding is crucial for buyers in planning financial contributions toward purchasing a home, as it affects their overall budget and financial readiness.