The Mortgage LTV vs CLTV
The LTV and the CLTV of your mortgages are ratios that are used to determine if a borrower is eligible or qualified for the home loan. But what do these abbreviations stand for and how are the two different from each other?
LTV or loan to value ratio is the ratio of your mortgage balance to the value of the home. The CLTV or the combined loan to value ratio, on the other hand, is the ratio of the total amount of loans on the property to its value.
Let’s start to understand the difference between LTV vs CLTV.
The Difference
The loan to value ratio of your mortgage is the ratio of the first mortgage balance to the value of the property, whereas the combined loan to value ratio considers the total of all your home loans for the calculation.
For example, a second mortgage, a home equity loan, or lines of credit where your home is the collateral, will all be added and considered during the calculation of CLTV.
The loan to value ratio of your mortgage will always be lesser than or equal to the combined loan to value ratio. It is due to this fact that the lenders have a higher maximum limit for CLTV than the LTV ratio.
LTV vs CLTV Calculation
LTV calculations have a lot to do with the down payment you make for your mortgage loan.
The ratio is almost the complete opposite of the down payment as it is equal to the balance of the mortgage divided by the total value of the property.
For a better understanding let us consider an example of a home valued at $200,000.
A down payment of 20% brings the balance to $160,000. Dividing this amount ($160,000) by the value of the home ($200,000), we get the LTV ratio equal to 80%.
Which, in simple words, is the part of the property value that is not covered by the down payment of 20%.
Value of the property: $200,000
Balance mortgage: $160,000
LTV Ratio: 80%
The combined loan to value ratio is calculated similarly.
For calculating the CLTV you have to add the loan amount of the first mortgage to the outstanding amounts of other mortgages, home equity lines of credit, and home equity loans.
CLTV considers the amount that you draw on the line of credit for a home equity line of credit or HELOCs.
After adding these numbers, the total amount is then divided by either the appraised value of the property or the sales price, whichever is the lower value.
Let us consider an example. The value of the property is $200,000, and we have two mortgages, one of $80,000 and another of $75,000.
Along with the two mortgages we have used a HELOC to draw $10,000 and the same property is used as collateral for all of these. Thus, the total outstanding balance after adding them all comes out to be $165,000. Diving this amount by the value of the property i.e., $200,000, we get the CLTV as 82.5%.
Balance of the first mortgage: $80,000
Balance of the second mortgage: $75,000
Drawn from HELOC: $10,000
Total: $165,000
Home appraised value or sales price: $200,000 (Lesser value)
CLTV Ratio: 82.5%
If after you have purchased a home, the appraised value of it goes down, this lower value will be considered for the calculation of your CLTV. However, this will only make a difference if you refinance your mortgage.
Why CLTV Matters
CLTV is used by mortgage lenders, in situations wherein the borrower has more than one mortgage on the same property or home.
Lenders require CLTV calculations to determine the risk when dealing with a borrower that has multiple liens on the home and LTV ratios only consider the first mortgage for calculations.
A lot of people use funds from a second loan or mortgage to lower their down payment which results in a decreased LTV on the first mortgage.
A lender will consider both, the LTV and CLTV of the property if you are considering applying for more than one loan or mortgage.
Some home loan products also consider the HCLTV or the home equity combined loan to value ratio. Rather than the amount you have withdrawn from the HELOC, the HCLTV considers the total amount of your HELOC.
Thus, your HCLTV ratio will always be higher than the CLTV, and lenders are more likely to consider the highest value amongst LTV, CLTV, and HCLTV.
You may possibly find it tougher to get approved for a refinancing later if you have used HELOC to finance the home purchase in the past.
About Loan To Value Ratio (LTV)
When you are purchasing a home or refinancing your current mortgage, you will come across a term called the loan to value ratio(LTV). It is one of the crucial parameters when it comes to financing.
The lenders would look at this parameter as one of the significant qualifying components. Let’s break it down and understand this phenomenon from a lender’s perspective.
What is a loan to value ratio?
LTV is a ratio to know how much money you are borrowing against the collateral.
When you are purchasing a home or refinancing it, you will come across the term LTV ratio through your loan officer.
Other than your credit score and income, your loan officer will also consider the Loan to value ratio to qualify your mortgage.
For example: if you are purchasing a home and you are willing to put a 20% down payment, your LTV is 80%. For a typical conventional loan, the LTV considered is up to 80%.
Lower the LTV better are the terms of the loan that you can qualify for.
Below is an example of how to calculate the loan to value ratio.
Why is LTV Important?
Why is LTV so important? What does it mean to a borrower? What does it mean to a lender? And what is a good LTV?
Lower the LTV lower is the cost of the loan to the borrower because when the LTV is low, the risk perceived by the lender is lower.
And when the LTV is high, the risk is higher for the lender. Your loan to value ratio could be a deciding factor for the lender to know which program is best suited for you.
Benefits of Lower LTV
When it comes to a new home purchase, it is always suggested to put as much as the down payment you can.
The upside of doing that is it would help you to lower your costs and fetch you a better interest rate on your mortgage. The second benefit is, if your LTV is low, this means you have good home equity.
Your home equity is your money in the house, and you can use it whenever you require cash.
Another advantage of having a lower loan to value ratio is the possibility of you avoiding the private mortgage insurance (PMI) in your monthly payments.
LTV Restrictions Based On Loan Programs
Every mortgage program, whether conventional, FHA, VA, or USDA all have certain LTV restrictions based on the type of transaction.
Conventional loan programs can go up to 97% loan to value ratio on a purchase transaction based on property type and occupancy.
The catch is if your LTV is going above 80% you will have to pay private mortgage insurance (PMI) in addition to your monthly mortgage payments.
FHA can go up to 96.5% LTV for a purchase transaction provided you meet the parameters set by the FHA guidelines.
VA offers 100% financing on the purchase transaction. USDA loan can go up to 100% LTV as well based on your qualifications and the guidelines set by the USDA department for a purchase transaction.
Conclusion
LTV is a significant financial metrics that are significantly relied upon by lenders to make their decision to lend you money and the type of program you qualify for.
On average, the LTV when it comes to new property purchases generally ranges between 60 to 80%.
Any loan to value ratio below 75% can be considered reasonable and risk-free by the lenders.
The amount of money you are putting as a down payment may help the lender to analyze, which loan program suits you the most?
A proper loan officer will always suggest multiple options with the benefits of the programs to help you make an informed decision.