When applying for a home loan or refinancing, lenders closely assess your Combined Loan-to-Value (CLTV) ratio—the total of all loans secured by the property compared to its current value. Normally, lenders have maximum CLTV limits to minimize their risk. However, a CLTV Exception Approval is a special allowance permitting a borrower to exceed these limits if they can demonstrate exceptional financial strength.
Understanding CLTV
Combined Loan-to-Value ratio (CLTV) sums the balances of all liens against a property—including first mortgages, second mortgages, and home equity lines of credit (HELOC)—divided by the home’s appraised value. For example, a $320,000 first mortgage plus a $40,000 second loan on a $400,000 house equals a 90% CLTV.
How CLTV Exception Approval Works
Under typical guidelines, if the maximum CLTV allowed is 85%, a borrower with 90% CLTV would be denied. However, lenders may grant an exception after thorough underwriting review if the borrower’s overall risk profile is strong enough. These compensating factors help the lender manage risk and justify approval despite the elevated CLTV.
Common Compensating Factors
Lenders consider several financial strengths when approving CLTV exceptions, including:
- Excellent Credit Score: Demonstrates responsible borrowing history (learn more).
- Low Debt-to-Income Ratio: Ensures manageable monthly payments (read on).
- Significant Cash Reserves: Provides a safety net post-closing (details).
- Stable Employment and Income: Confirms consistent ability to repay loans.
- Limited Payment Shock: New mortgage payments don’t drastically increase housing costs.
Risks and Rewards
For borrowers, CLTV exceptions enable access to needed financing but come with risks like potential negative equity if home values drop. Lenders benefit by expanding business to creditworthy borrowers but face higher risk if property values decline.
Applying for a CLTV Exception
To improve your chances, disclose your full financial picture transparently, highlight your strengths, clarify your financing needs, and work with an experienced loan officer familiar with underwriting exceptions.
By understanding the nuances of CLTV Exception Approval and preparing accordingly, borrowers can navigate higher leverage scenarios responsibly. For further details, see the Consumer Financial Protection Bureau’s guide on debt-to-income ratios and consult Fannie Mae’s underwriting criteria on compensating factors.
