When applying for a mortgage or home equity loan, lenders rely heavily on Loan-to-Value (LTV) and Combined Loan-to-Value (CLTV) ratios to assess risk and determine loan eligibility. Understanding these metrics is essential for borrowers looking to secure favorable loan terms.
What is Loan-to-Value (LTV)?
Loan-to-Value (LTV) is the ratio of the amount borrowed on a single loan to the current appraised value of the property securing it. Calculated as LTV = Loan Amount ÷ Appraised Property Value, it indicates the proportion of the home’s value financed by the lender.
For example, if you take out a $240,000 mortgage on a home valued at $300,000, your LTV is 80%. A lower LTV suggests less risk for lenders because the borrower has more equity invested upfront. Conventional lenders often require an LTV of 80% or less to avoid private mortgage insurance (PMI).
Learn more about LTV on our detailed page: Loan-to-Value Ratio (LTV).
What is Combined Loan-to-Value (CLTV)?
Combined Loan-to-Value (CLTV) looks at all loans secured by a property, combining the balances of the first mortgage plus any additional liens like home equity loans or lines of credit. It is calculated as CLTV = (Sum of All Loan Balances) ÷ Appraised Property Value.
For instance, if your home is worth $300,000 and you have a $200,000 mortgage plus a $40,000 home equity line of credit balance, your CLTV is approximately 80%. Lenders use CLTV to ensure the total indebtedness on a property remains within acceptable limits.
Explore more about CLTV here: Home Equity Line of Credit (HELOC).
Why LTV and CLTV Matter
Lenders care deeply about these ratios because they indicate how much equity you have in your property and how much risk they face if you default. A lower LTV or CLTV typically means lower interest rates, avoids mortgage insurance requirements, and increases your chances of loan approval.
For conventional loans, if your LTV exceeds 80%, you usually must pay Private Mortgage Insurance (PMI), which protects the lender, not you. Learn more about PMI here: Private Mortgage Insurance (PMI).
Key Differences at a Glance
| Aspect | Loan-to-Value (LTV) | Combined Loan-to-Value (CLTV) |
|---|---|---|
| Measures | Single loan vs. property value | All loans vs. property value |
| Use | First mortgage approval, refinancing | Second mortgages, home equity loans, HELOCs |
| Risk focus | Risk on primary loan | Total risk for all secured lenders |
Tips to Improve Your Ratios
- Make a larger down payment to reduce LTV.
- Pay down existing mortgage balances to lower both ratios.
- Increase your property’s appraised value through improvements.
- Limit additional loans secured by your home to keep CLTV manageable.
Understanding LTV and CLTV ratios empowers you to make informed decisions when buying, refinancing, or borrowing against your home’s equity. For more comprehensive guidance on mortgage basics and credit, visit Consumer Financial Protection Bureau’s Mortgage Guide.
By mastering these concepts, you can navigate loan negotiations more confidently and potentially secure better loan terms.