The combined loan-to-value ratio (CLTV) is a calculation used by mortgage and loan professionals to determine the total percentage of a homeowner’s property that is encumbered with liens. The CLTV ratio is determined by adding the balances of all outstanding loans and dividing by the current market value of the property. For example, a property with a first mortgage balance of $ 300,000, a second mortgage balance of $ 100,000 and a value of $ 500,000 has a CLTV ratio of 80%.
Lenders use the CLTV ratio along with a handful of other calculations, such as the debt to income ratio and the standard loan-to-value ratio (LTV), to assess the risk of granting a loan to a borrower. The CLTV ratio differs from the standard LTV ratio because the latter only compares the balance of a loan to the value of the property. In the example above, the property has an LTV ratio of 60%, which is obtained by dividing only the balance of the first mortgage by the value of the property.
Many economists attribute the relaxation of CLTV standards to the seizure crisis that plagued the United States in the late 2000s, among other factors. Beginning in the 1990s and especially in the early and mid-2000s, homebuyers frequently took out a second mortgage at the time of purchase instead of making down payments. Lenders, keen not to lose these clients’ businesses to competitors, have agreed to such terms despite the increased risk.
Before the real estate bubble that spread from the late 1990s to the mid-2000s, it was common practice for homebuyers to make down payments totaling at least 20% of the purchase price. Most lenders have kept clients within these parameters by capping the LTV at 80%. When the bubble started to heat up, many of those same companies took steps to allow customers to bypass the 20% bet. Some lenders have raised LTV caps or removed them altogether, offering mortgages with down payments of 5% or less, while others have kept LTV requirements in place but raised CLTV caps, often to 100. %. This maneuver allowed clients to take out second mortgages to finance their 20% down payment.
The foreclosure peak from 2008 underscored why CLTV is important. Having the skin in the game, such as an initial down payment of $ 100,000 for a $ 500,000 home, provides the homeowner with a powerful incentive to maintain their mortgage payments. If the bank forecloses, he loses not only his house but also the pile of money he paid to close. Requiring equity in the property also insulates lenders from falling property prices. If a property is valued at $ 500,000 and the total of the liens amount to $ 400,000, the property can lose up to 20% of its value without any lien holder receiving a short payment upon termination. a foreclosure auction.