If a home is purchased for $375,000 and the buyer has a first mortgage of $175,000, what is the maximum amount of the second mortgage if the loan-to-value cannot exceed 85%?

To determine the maximum amount of the second mortgage, we first need to calculate the total allowable loan amount based on the loan-to-value (LTV) ratio limit of 85%.

Start by calculating 85% of the home's purchase price of $375,000. This is done by multiplying the purchase price by 0.85:

[

0.85 \times 375,000 = 318,750

]

This $318,750 is the maximum total amount of debt that the buyer can have against the property, which includes both the first mortgage and the second mortgage.

Next, we need to account for the existing first mortgage, which is $175,000. To find the maximum amount available for the second mortgage, subtract the first mortgage balance from the total allowable debt:

[

318,750 - 175,000 = 143,750

]

This calculation indicates that the maximum amount of the second mortgage that the buyer can take out without exceeding the 85% LTV limit is $143,750.

Understanding this context explains why the answer provided fits the requirements of the question, confirming that the second mortgage amount adheres to the established loan-to-value ratio.