Combined Loan-To-Value Ratio (CLTV Ratio)

Posted on by user

Combined Loan-to-Value (CLTV) Ratio

What is CLTV?

The combined loan-to-value (CLTV) ratio measures the total amount of secured loans on a property relative to the property’s market value. Unlike the standard loan-to-value (LTV) ratio, which includes only the primary mortgage, CLTV includes all liens—first mortgage, second mortgage, home equity loans, and HELOCs. Lenders use CLTV to assess overall collateral risk when multiple loans are secured by the same property.

How to calculate CLTV

CLTV is expressed as a percentage:

CLTV = (Sum of all loan balances / Property value) × 100%

Example:
– Property price: $200,000
– Primary mortgage: $100,000
– Second mortgage: $50,000
CLTV = (($100,000 + $50,000) / $200,000) × 100% = 75%

What CLTV reveals and why it matters

  • Risk assessment: A higher CLTV means more of the property’s value is pledged as collateral, increasing lender risk and the likelihood of higher interest rates or denial.
  • Foreclosure priority: In a foreclosure sale, lenders are paid in order of lien priority. Primary lenders have first claim; subordinate lienholders (seconds) face greater loss risk if property values fall.
  • Historical context: Relaxed CLTV and LTV standards contributed to increased defaults during the 2007–2009 financial crisis. Requiring borrower equity (typically 20% down) reduces both borrower incentives to default and lender exposure to price declines.

LTV vs. CLTV

  • LTV: Includes only the primary mortgage balance divided by property value.
  • CLTV: Includes all secured loans against the property.
  • Practical effect: A borrower can have an LTV below lender maximums (e.g., 80%) while having a higher CLTV because of second loans. Lenders evaluate both measures during underwriting.

Special considerations

  • Private Mortgage Insurance (PMI): PMI is required when the primary mortgage LTV exceeds lender thresholds (commonly 80%). Borrowing a second mortgage can reduce the primary mortgage LTV and help avoid PMI, but increases total CLTV.
  • Interest rates: Second mortgages typically carry higher interest rates because they are subordinate and riskier for lenders.
  • Trade-offs: Choosing a second mortgage vs. paying PMI depends on the borrower’s credit, interest rates, fees, and long-term plans for the property.

How CLTV affects loan decisions

  • Approval and pricing: Higher CLTV increases perceived lender risk and can lead to loan denial or higher interest rates and stricter terms.
  • Lender limits: Many lenders prefer CLTVs at or below 80% for conventional lending, though exceptions exist for borrowers with strong credit profiles or specific loan programs.

What loans are included in CLTV

  • First (primary) mortgage
  • Second mortgage
  • Home equity loans
  • Home equity lines of credit (HELOCs)
  • Any other secured loans recorded against the property

Bottom line

CLTV provides a fuller picture of how much of a property’s value is encumbered by debt. Borrowers should weigh the benefits of multiple loans (lower primary LTV, avoiding PMI) against the costs (higher combined leverage, potentially higher interest on subordinate loans). Understand the total borrowing against a property before taking additional liens and shop loan options to find the most cost-effective approach.