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

If you have a home equity line of credit (HELOC) and have recently applied for a mortgage, you may have run across the acronym HCLTV, which stands for home equity combined loan-to-value or high combined loan-to-value.

So what is HCLTV all about? Why does it matter when you’re applying for a mortgage? We’ll cover what HCLTV is and how it impacts a mortgage application.

What Does HCLTV Mean?

To understand HCLTV, we need to first understand loan-to-value, or LTV. Loan-to-value is one of the most important considerations 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 by the home value and multiplying by 100 to get a percentage.

For example, if the loan amount is $200,000 and the home is worth $400,000, the loan-to-value is 50%. In other words, the loan amount equals 50% of the value of the house, which is a very safe number for lenders.

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 a lot of equity in the home are more likely to maintain their home and pay their payments on time, even if they run into financial trouble.
3. Borrowers with a lot of equity are less likely to walk away from the mortgage if they run into financial trouble.

Mortgage offers with low loan-to-values tend to have lower interest rates and costs than higher loan-to-value loans because they’re less risky for mortgage lenders.

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How Your HCLTV Ratio Is Calculated

HCLTV is similar to LTV, but it only applies if you have a HELOC. Lenders look at HCLTV because it represents the potential total loan-to-value between your HELOC and all other mortgages on your home.

To see how this 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 for a new loan amount of $120,000.

This borrower also has a HELOC with a $40,000 balance and a total credit line of $80,000. In other words, he owes $40,000 on the HELOC, but he can borrow up to a total of $80,000 if he needs it. Here’s how the lender first calculates the LTV:

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

As you can see, the total 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.

Now, of course, that’s not the only loan against the home. The lender will also want to calculate CLTV, which stands for combined loan-to-value:

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

As you can see, the combined loan-to-value includes the total balance on the new primary loan and the HELOC.

Since there’s a HELOC in the picture, the lender will also calculate the HCLTV:

$200,000 (new primary mortgage balance) + $40,000 (HELOC balance) + $40,000 (HELOC available credit) / $400,000 (home value) = 0.50 (50% HCLTV)

Again, the HCLTV takes into account the total potential combined loan-to-value if the borrower maxes out the HELOC. HCLTV includes the balances of both mortgages and the available credit on the HELOC.

Why It Matters

So, why do lenders care about HCLTV? 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 HELOC in the event of foreclosure.

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

Lenders care about HCLTV because they know that borrowers with little to no equity in their homes are more likely to walk away from their mortgage if they get into financial trouble. HCLTV represents potential LTV-related risk for a lender. Lenders calculate HCLTV because they want to make sure there’s a certain amount of equity still in the home even if the homeowner maxes out their HELOC.

Believe it or not, mortgage lenders actually don’t want to foreclose. They’re in the business of lending money, not selling real estate. Lenders want to make sure they’re writing loans that have a good chance of providing steady interest payments for many years to come.

Some Final Notes

If you’re refinancing a first mortgage and subordinating an existing HELOC, the lender will calculate the HCLTV to make sure it’s within their guidelines. Be prepared to give them a copy of the original HELOC credit agreement so the underwriter can review the terms and determine how much available credit you still have.

If you have problems getting approved because of a high HCLTV, you may want to contact the bank issuing the HELOC to see if they can reduce your credit limit. The lower CLTV could make the difference between getting approved and getting turned down for your refinance loan.

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