CLTV: A Simple Explanation of What It Is And Why It Matters

If you have more than one mortgage on your home and have recently applied for a mortgage, you may have run across the acronym CLTV, which stands for combined loan to value.

So what is CLTV all about? Why does it matter when you’re applying for a home loan? We’ll cover what CLTV is and why it matters for a mortgage application.

What Is Combined Loan to Value?

To understand the CLTV meaning, we need to first understand loan-to-value, or LTV. Loan-to-value is an important qualifying criteria for lenders because it helps them determine the risk of loss if you stop making payments and go into foreclosure.

Lenders calculate loan-to-value by dividing the final loan amount of your primary mortgage by your home’s value, then multiplying it by 100 to get a percentage.

For example, if your new loan amount is $250,000 and the home is worth $500,000, the loan-to-value is 50%. In other words, the loan amount equals 50% of the value of your home.

Lenders like low loan-to-values for several reasons:

1. The home is more likely to sell for enough in a foreclosure sale to cover the entire loan balance and attorneys fees.
2. Borrowers with substantial home equity are more likely to maintain their home and keep up with their payments even if they run into financial trouble.
3. Borrowers with a lot of equity are less likely to walk away from their mortgage if they run into financial trouble.

Mortgage offers with low loan-to-values tend to have lower interest rates and costs than offers with high loan-to-values.

Loan-to-value takes into account just the balance on your primary loan. Combined loan-to-value is calculated similarly, but it takes into account the total mortgage balances of all mortgages on your home.

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How Combined Loan-to-Value Is Calculated

CLTV is similar to LTV, but it only applies if you have more than one mortgage on your home. Lenders look at CLTV because it represents the total loan-to-value of all mortgages on your home.

The formula for CLTV is pretty simple:

( total mortgage balances / home value ) * 100 = combined loan-to-value

To see how the calculation works, let’s check out an example. Let’s assume we have a borrower with a home worth $400,000 who is refinancing his primary mortgage with a new loan amount of $120,000. Let’s also assume this borrower has a second mortgage with a $40,000 balance.

Here’s how the lender would first calculate the LTV for the primary mortgage:

$120,000 (new primary mortgage balance) / $400,000 (home value) = 0.30 (30% LTV)

As you can see, the loan-to-value for the new primary mortgage is 30%. In other words, this borrower will owe 30% of his home’s value on that mortgage at closing.

Now, of course, that’s not the only loan against the home. The lender will also calculate CLTV:

$120,000 (new primary mortgage balance) + $40,000 (HELOC balance) / $400,000 (home value) = 0.40 (40% combined loan to value)

As you can see, the combined loan-to-value includes the total balances of both mortgages.

Calculating CLTV is pretty easy, but if you’d rather not do the math on your own, feel free to check out our CLTV calculator.

Why It Matters

So, why do lenders care about CLTV? In the example above, the lender offering the $120,000 loan is in first lien position, which means they get a priority payoff ahead of the second mortgage in the event of foreclosure.

The $120,000 mortgage also only equals 30% of the home value. It seems like the primary mortgage holder should be more than covered by the value of the home, right?

Lenders care about this because they know that borrowers with little to no equity in their homes are more likely to walk away from their mortgage (or mortgages) if they get into financial trouble. Lenders calculate the combined loan-to-value of all loans on the home because they want to make sure there’s a certain amount of equity still in the home after accounting for all the mortgage balances.

You may be surprised to hear that mortgage lenders actually don’t want to foreclose. Mortgage lenders are in the business of lending money, not acquiring and selling real estate.

Lenders want to make sure they’re approving loans that have a good chance of providing steady interest payments for many years to come. They know that borrowers with high combined mortgage balances (and more than one mortgage payment) are a greater risk than borrowers with tons of equity in the home.

A Final Note

If you have a home equity line of credit (HELOC), the lender will also calculate HCLTV, which stands for home equity combined loan-to-value. This is also an important qualifying factor that takes into account the potential combined loan to value if you max out your HELOC.

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