What does combined loan to value (CLTV) mean?

What does combined loan to value (CLTV) mean

Mortgage and banking experts use the combined loan-to-value (CLTV) ratio to calculate the overall proportion of a homeowner’s property covered by liens. The sum of all outstanding loan amounts divided by the property’s current market value is the CLTV ratio. The CLTV ratio, for instance, is 80% on a property with a first mortgage debt of $300,000, a second mortgage balance of $100,000, and a value of $500,000.

Lenders use the CLTV ratio, along with other computations such as debt-to-income and LTV ratios, to assess the risk of granting credit. While the LTV ratio only considers the balance of one loan relative to the property value, the CLTV ratio considers the total balance of all loans against the property.

Looser CLTV requirements have been linked by analysts to the foreclosure crisis in the late 2000s. Homeowners in the 1990s and early to mid-2000s often chose second mortgages instead of down payments. Lenders, keen not to lose these clients’ business to rivals, agreed to such terms regardless of the greater risk.

Formula and Calculation for CLTV Ratio

The sum of all loans on the property, including the one for which you are requesting, is divided by its value to get the CLTV ratio. A percentage is used to represent it. In general, lenders are prepared to lend to customers with excellent credit scores at CLTV ratios of 80% and below. The combined loan-to-value (CLTV) ratio may be calculated using the formula below:

How CLTV Ratio Indicates

The CLTV ratio is used by lending experts to determine the percentage of a property with liens against its value. Lenders assess credit risk by considering the CLTV ratio along with other measures like debt-to-income and LTV ratios.

Insufficient CLTV regulations were a contributing factor to the US foreclosure crisis in the late 2000s. Buyers increasingly chose second mortgages over down payments, which lenders allowed to retain their business.

Homebuyers Expected

Homebuyers were often expected to put down payments equal to at least 20% of the purchase price before the real estate bubble that grew from the late 1990s to the mid-2000s. Most lenders cap LTV at 80% to keep clients within these bounds.

Several of these same businesses took action to enable clients to avoid paying 20% down as the bubble started to heat up. Several lenders increased LTV limitations or altogether eliminated them, giving mortgages with down payments of 5% or less, while others maintained LTV standards but increased CLTV ceilings, sometimes to 100%. Customers were able to finance their 20% down payments with second mortgages thanks to this technique.

The rise in foreclosures that started in 2008 made clear how crucial CLTV is. Skin in the game, such as a $100,000 down payment on a $500,000 property, gives a homeowner a strong incentive to make mortgage payments on time. When a bank forecloses, a homeowner loses both their house and the large sum of money they used to close on the deal. Lenders are protected against a decline in real estate values by requiring equity in the property.

Particular Considerations

Some homebuyers decide to receive several mortgages on a property to reduce their down payment, which lowers the loan-to-value ratio for the principal mortgage. Also, many purchasers effectively avoid private mortgage insurance due to the lower LTV ratio (PMI). The borrower’s specific situation will determine whether it is preferable to have a second mortgage or pay for PMI.

As a result, the interest rate on a second mortgage is often greater than the interest rate on a first mortgage since the second mortgage carries more risk.

CTLV Example

Suppose you are spending $200,000 on a house. You put down $50,000 to secure the property and were granted two mortgages: a $100,000 (main) mortgage and a $50,000 (secondary) mortgage. Your total loan to value (CLTV) is 75% ($200,000 / $100,000 + $50,000).

CLTV vs. Loan-to-Value

Two of the most popular ratios utilized in the mortgage underwriting process are loan-to-value (LTV) and CLTV. The majority of lenders set upper limits for both values, above which a potential borrower is ineligible for a loan. The CLTV ratio takes into account all loans secured by the property, including home equity loans and home equity lines of credit, whereas the LTV ratio solely takes into account the principal mortgage debt (HELOCs).

The majority of lenders set 80% LTV maximums. Borrowers with strong credit histories are exempt from this requirement, but they still have to pay private mortgage insurance (PMI) if their total debt exceeds 80% of the value of their property. When a home’s value declines below the loan sum, PMI shields the lender from losses.

How Do Rates Affect My CLTV Ratio?

A borrower with a high CLTV ratio is typically viewed as having a higher risk by a lender. If the loan is accepted, the interest rate will increase as a result.

A Decent CLTV Ratio: What Is It?

Generally speaking, lenders like to see a CLTV ratio of 80% or below. The borrowers will also require strong credit ratings.

What Loans Are Included in a CLTV Ratio?

Lenders take all secured loans on the property into account when computing the CLTV ratio. First and second mortgages, home equity loans, and home equity lines of credit are all examples of HELOCs

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