Understanding Combined Loan-to-Value (CLTV) Ratios

The Combined Loan-to-Value (CLTV) ratio is a financial metric used in the lending industry to evaluate the risk of lending money for a mortgage based on the total mortgage debts secured by a property compared to its appraised value. It is particularly relevant when a borrower takes out more than one loan on the same property, such as a primary mortgage combined with a home equity loan or line of credit.

CLTV is calculated by adding the outstanding loan amounts of all loans secured by the property and dividing that total by the property's current market value. The formula can be expressed as:

The formula can be expressed as:

CLTV = ( Primary Mortgage Balance + Secondary Loan Balance(s) ) x 100

Appraised Property Value

Key Takeaways

Key Aspects of CLTV Include

1. 1. Risk Assessment Tool: Lenders use CLTV to assess the risk associated with lending. A higher CLTV ratio indicates higher risk, suggesting the property is heavily leveraged. Lenders may impose stricter lending criteria or higher interest rates for loans with high CLTV ratios.
2. 2. Impact on Borrowing: The CLTV ratio can impact a borrower's ability to secure additional financing on a property. Lenders typically have maximum CLTV limits for loans, such as home equity loans or lines of credit. Exceeding these limits can make it difficult to qualify for additional borrowing.
3. 3. Refinancing and Equity: Borrowers looking to refinance their mortgage or take out a home equity loan will find their CLTV ratio critical. A lower CLTV ratio often means better loan terms because it indicates that the borrower has more equity in the property.
4. 4. Loan Approval and Terms: CLTV ratios are important for loan approval decisions and determining the terms of a loan, including interest rates and whether mortgage insurance will be required. Loans with a high CLTV ratio may require the borrower to purchase mortgage insurance, adding to the loan cost.

Conclusion

Understanding one's CLTV ratio is important for managing property equity and financing decisions, especially for homeowners considering refinancing or taking out additional loans against their home's value.

FAQs

1. What is a good CLTV ratio for obtaining a home equity loan?

A good CLTV ratio for obtaining a home equity loan typically varies by lender, but many lenders prefer a CLTV of 85% or lower. This means the combined balance of your primary mortgage and home equity loan should not exceed 85% of your home's value. Lower CLTV ratios may qualify you for better rates and terms.

2. Can improving my home's value affect my CLTV ratio?

Yes, improving your home's value can positively affect your CLTV ratio by increasing the denominator in the CLTV calculation. This can happen through home improvements or market value increases. A higher home value lowers your CLTV ratio, allowing for better refinancing options or the ability to take out a home equity line of credit (HELOC) under more favorable conditions.

3. How does a decrease in property value impact my CLTV?

A decrease in your property's market value can increase your CLTV ratio, as it reduces the property's appraised value used in the denominator of the CLTV calculation. This can lead to a higher perceived lending risk and may affect your ability to refinance or obtain additional financing. Sometimes, it may also require you to pay for private mortgage insurance (PMI) if the CLTV ratio exceeds the lender's threshold.