Combined Loan to Value (CLTV) is the total of all mortgage loans on a property expressed as a percentage of the property value. CLTV reflects the proportion of property that is financed by debt.
The purpose of CLTV is to assess the availability of collateral (real estate) to meet loan repayment. The primary source of repayment is the borrower’s income from which the borrower makes monthly payment. In the event the borrower losses the income, the lender falls back on the secondary source of repayment which is the liquidation of the real estate (foreclosure process).
CLTV is calculated by dividing the outstanding balance for all the loans against the property by the property value. At the time of purchase, property value is the lower of appraised value and the purchase price. At any other time property value is the fair market value such as the appraised value. Appraised value is the valuation of the property provided by a licensed appraiser. Purchase price is the amount that the buyer is paying to the seller at an arms-length transaction.
Lenders use CLTV ratio as a measure of risk. It measures the amount of collateral that is available to cover the outstanding debt. CLTV is of great importance to lenders that provide loan with a secondary lien position. The higher the CLTV, the higher is the risk the borrower may default on the loan. A 100% CLTV loan means that the borrower is using 100% financing for the property purchase. If the market goes down, the borrower may simply walk away from the loan without losing much, other than credit history. For this reason, lenders usually cap the maximum CLTV that they are willing to lend up to. Also, as the CLTV increases, the criteria for obtaining the loan increase. For example, loans with CLTV up to 80% may be given to borrowers having a credit score of 650 or more. However, loans CLTV greater than 80% would be restricted to borrowers having credit score above 720.
CLTV is not used in isolation. Lenders use various risk indicators such as LTV , credit score, housing ratio and DTI , to assess the overall level of risk.
CLTV is calculated by dividing the outstanding balance for all the loans against the property by the property value. It can be expressed using the formula below.
Or,
Rewritten as
Where,
| CLTV | = | Combined Loan To Value |
| Pk | = | Principal amount for loan k |
| PV | = | Property value (Lower of purchase price and appraised value) |
| n | = | Number of loans |
CLTV is equal to sum of all LTVs. It can be expressed using the formula below.
Rewritten as
Where,
| CLTV | = | Combined Loan To Value |
| LTVk | = | LTV for loan k |
| n | = | Number of loans |
Roland obtains a first lien loan for $75,000 and a second lien loan for $5,000. The appraised value is $100,000 and the purchase price is $101,000.
Where,
| Principal (P1) | = | $75,000 |
| Principal (P2) | = | $5,000 |
| Property Value (PV) | = | $100,000. Lower of appraised value($100,000) and the purchase price($101,000) |
Also,
Roland obtains a loan for $75,000. The appraised value is $100,000 and the purchase price is $101,000.
Where,
| Principal (P1) | = | $75,000 |
| Property Value (PV) | = | $100,000. Lower of appraised value($100,000) and the purchase price($101,000) |
If there is only one loan on the property then LTV equals CLTV.
Roland refinances his loan with an outstanding balance of $75,000. He now takes another loan for $15,000. The appraised value is $125,000.
Where,
| Principal (P1) | = | $75,000 |
| Principal (P2) | = | $15,000 |
| Property Value (PV) | = | $90,000. |
Also,
Updated: Nov 24, 2013
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