What Is the Combined Loan-to-Value (CLTV) Ratio?

What Is the Combined Loan-to-Value (CLTV) Ratio?

Let me explain the combined loan-to-value (CLTV) ratio directly: it's the ratio of all secured loans on a property to the property's value. As a lender, I use the CLTV ratio to figure out a prospective borrower's risk of default when they're using more than one loan.

You should know that CLTV differs from the simple loan-to-value (LTV) ratio because LTV only accounts for the first or primary mortgage in its calculation.

Key Takeaways

Here's what you need to grasp: the CLTV ratio is simply the ratio of all loans on a property to its value. Lenders like me look at CLTV ratios to determine the risk of a borrower defaulting. Generally, we're willing to lend to borrowers with strong credit scores if their CLTV ratios are 80% or below. The subprime-mortgage-driven financial crisis of 2007-2009 really highlighted why monitoring CLTV ratios matters.

Formula and Calculation of the CLTV Ratio

To calculate a CLTV ratio, you divide the amount of all loans on the property, including the one you're applying for, by its value, and express it as a percentage. Lenders are typically open to CLTV ratios of 80% and below for borrowers with high credit ratings. Use this formula: CLTV = (VL1 + VL2 + ⋯ + VLn) / Total Value of the Property, where VL stands for the value of each loan.

What the CLTV Can Tell You

The combined loan-to-value (CLTV) ratio is a key calculation that mortgage professionals use to determine the total percentage of a homeowner's property that has liens compared to its value. We pair the CLTV ratio with other metrics like the debt-to-income ratio and the standard LTV ratio to evaluate the risk of lending to a borrower.

Many economists point to relaxed CLTV standards as a factor in the foreclosure crisis that hit the US in the late 2000s. From the 1990s and especially in the early and mid-2000s, homebuyers often took out second mortgages instead of making down payments, and lenders, not wanting to lose business, agreed despite the higher risk.

Before the real estate bubble from the late 1990s to mid-2000s, standard practice required homebuyers to put down at least 20% of the purchase price, with lenders capping LTV at 80% to enforce this. As the bubble grew, some lenders raised LTV caps or eliminated them, offering low or no down payment mortgages, while others kept LTV but raised CLTV caps, letting buyers use second mortgages for their 20% down.

The 2008 foreclosure spike showed why CLTV is crucial. When you have skin in the game, like a $100,000 down payment on a $500,000 house, it motivates you to borrow only what you can afford and keep up payments. If foreclosed, you lose not just the home but your cash investment. Requiring equity protects lenders from real estate price drops, reduces monthly payments, and demonstrates your ability to pay. Larger down payments lead to responsible lending, but lenders can drop these safeguards, as they did in the 2000s.

Special Considerations

Some homebuyers opt to lower their down payment by getting multiple mortgages on a property, which creates a lower LTV for the primary mortgage. With this lower LTV, many avoid private mortgage insurance (PMI). Since the second mortgage carries more risk, its interest rate is usually higher than the first mortgage's. Deciding between a second mortgage or paying PMI depends on your specific situation.

Example of a CLTV Ratio

Suppose you're buying a home for $200,000. You put down $50,000 and get two mortgages: a primary one for $100,000 and a secondary for $50,000. Your CLTV ratio is 75%: (($100,000 + $50,000) / $200,000).

Loan-to-Value vs. CLTV

Loan-to-value (LTV) and CLTV are two common ratios in mortgage underwriting, with lenders setting maximums that disqualify borrowers if exceeded. LTV only looks at the primary mortgage balance, while CLTV includes all loans on the property, like home equity loans and HELOCs.

Most lenders cap LTV at 80%, but borrowers with good credit can bypass this by paying PMI until the primary loan drops below 80% of the home's value. PMI covers the lender's losses if the home value falls below the loan balance. Primary lenders are often more lenient with CLTV because, in foreclosure, they get paid first.

Using the earlier example, if the property value drops to $125,000 and you default, the primary holder gets the full $100,000, while the secondary gets only $25,000 of the $50,000 owed. This lower risk allows primary lenders to accept higher CLTV.

How Does My CLTV Ratio Impact Rates?

A high CLTV ratio makes you a higher risk to lenders, which might lead to loan denial or approval at a higher interest rate.

What Is a Good CLTV Ratio?

Lenders prefer a CLTV ratio of 80% or less, and you'll need good credit scores to qualify.

What Loans Does a CLTV Ratio Include?

When calculating CLTV, lenders include all secured loans on the property, such as first mortgages, second mortgages, home equity loans, and HELOCs.

The Bottom Line

You should weigh the pros and cons of multiple loans on one property. Doing your due diligence ensures you pick the best option for your circumstances.