Wisconsin Real Estate License Wisconsin Real Estate License Valuing and Financing Property Questions and Answers 2 — Questions and Answers
Question 1: A buyer is purchasing a home for $250,000 with a 20% down payment. What is the loan-to-value (LTV) ratio?
- 80% (Correct answer)
- 75%
- 85%
- 90%
Correct answer: 80%
With a 20% down payment on a $250,000 home, the loan amount is $200,000, making the LTV ratio $200,000 ÷ $250,000 = 80%.
Question 2: Which appraisal approach estimates value by calculating the cost to rebuild the structure minus depreciation, then adding land value?
- Cost approach (Correct answer)
- Sales comparison approach
- Income capitalization approach
- Gross rent multiplier approach
Correct answer: Cost approach
The cost approach estimates value by determining the replacement or reproduction cost of improvements, subtracting accrued depreciation, and adding the land value.
Question 3: Under Wisconsin law, what is the primary purpose of a property appraisal in a real estate transaction?
- To establish an opinion of market value for the lender (Correct answer)
- To determine the property tax assessment
- To set the listing price for the seller
- To calculate the buyer's closing costs
Correct answer: To establish an opinion of market value for the lender
The primary purpose of an appraisal in a real estate transaction is to provide the lender with an independent opinion of the property's market value to protect their investment.
Question 4: Which type of depreciation is caused by factors external to the property and is generally incurable?
- Economic obsolescence (Correct answer)
- Physical deterioration
- Functional obsolescence
- Deferred maintenance
Correct answer: Economic obsolescence
Economic (or external) obsolescence is caused by factors outside the property such as neighborhood decline or zoning changes and is typically incurable by the owner.
Question 5: In Wisconsin, a conventional loan that exceeds 80% LTV typically requires which of the following?
- Private mortgage insurance (PMI) (Correct answer)
- A second appraisal
- Seller concessions
- A land contract arrangement
Correct answer: Private mortgage insurance (PMI)
Conventional loans exceeding 80% LTV generally require private mortgage insurance to protect the lender against default risk.
Question 6: What does the capitalization rate represent in the income approach to property valuation?
- The rate of return an investor expects on a real estate investment (Correct answer)
- The annual percentage rate of the mortgage
- The rate of property value appreciation
- The percentage of gross income allocated to expenses
Correct answer: The rate of return an investor expects on a real estate investment
The capitalization rate represents the expected rate of return on an investment property and is used to convert net operating income into an estimate of value.
Wisconsin Real Estate License Wisconsin Real Estate License Valuing and Financing Property Questions and Answers 2
A buyer is purchasing a home for $250,000 with a 20% down payment.
What is the loan-to-value (LTV) ratio?