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- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
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.
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