# Combined Loan-To-Value Ratio (CLTV) In Real Estate; Definition, Formula, Example

The combined loan-to-value (CLTV) ratio is a critical metric used in real estate to assess the risk of loan default when multiple loans are involved. It represents the ratio of all secured loans on a property to the value of the property. Unlike the loan-to-value (LTV) ratio, which only considers the primary mortgage, the CLTV ratio takes into account all loans on the property.

Lenders use the CLTV ratio to determine a borrower’s risk of default and make decisions regarding loan approval and interest rates. In general, a CLTV ratio of 80% or below is preferred by most lenders. Calculating the CLTV ratio involves dividing the total value of all loans on the property by the value of the property.

### Key Takeaways:

• The combined loan-to-value (CLTV) ratio measures the ratio of all secured loans on a property to the value of the property.
• Lenders use the CLTV ratio to assess a borrower’s risk of default and make decisions regarding loan approval and interest rates.
• The CLTV ratio takes into account all loans on the property, unlike the loan-to-value (LTV) ratio that only considers the primary mortgage.
• A CLTV ratio of 80% or below is preferred by most lenders.
• The formula to calculate the CLTV ratio is dividing the total value of all loans on the property by the value of the property.

## Calculation and Meaning of CLTV Ratio

The combined loan-to-value (CLTV) ratio is a crucial metric used in real estate to assess risk and determine the interest rate of a loan. Unlike the loan-to-value (LTV) ratio, which only considers the balance of the primary mortgage, the CLTV ratio takes into account all outstanding debt obligations on the property. It provides a more comprehensive view of a borrower’s financial position and the level of equity in the property.

To calculate the CLTV ratio, divide the total outstanding balance of all loans secured by the property by the appraised value of the property. This ratio is expressed as a percentage. A higher CLTV ratio indicates less equity in the property and a higher likelihood of loan default. Lenders generally prefer CLTV ratios of 80% or less, as it indicates a lower level of risk for them.

It’s important to distinguish between CLTV and LTV ratios. While both ratios assess the risk of a loan, the CLTV ratio provides a more comprehensive picture by considering all outstanding debt obligations.

LTV ratios are typically used to determine the minimum down payment required for a loan, while CLTV ratios help lenders evaluate a borrower’s ability to afford the loan and assess the level of risk involved.

### CLTV vs LTV

The main difference between CLTV and LTV ratios is that CLTV takes into account all loans secured by the property, while LTV only considers the primary mortgage. This means that the CLTV ratio provides a more accurate assessment of a borrower’s financial position and the level of equity in the property. Lenders use both ratios to evaluate risk, but the CLTV ratio offers a deeper understanding of the borrower’s overall debt obligations.

In summary, the CLTV ratio is a crucial metric used in real estate to assess risk and determine the interest rate of a loan. It takes into account all outstanding debt obligations on the property and provides a comprehensive view of a borrower’s financial position.

Lenders generally prefer CLTV ratios of 80% or less, as it indicates a lower level of risk. By understanding the calculation and meaning of the CLTV ratio, borrowers can better assess their financial position and make informed decisions when applying for a loan.

Table of Comparison of CLTV vs LTV:

Aspect Combined Loan-to-Value (CLTV) Loan-to-Value (LTV)
Definition The ratio of the total loan amount(s) to the appraised value of the property. It includes all loans secured by the property. The ratio of the loan amount to the appraised value of the property. It typically refers to a single loan.
Calculation (Sum of all Loan Amounts) ÷ Appraised Value of Property Loan Amount ÷ Appraised Value of Property
Scope Takes into account multiple loans secured by the property, such as a first mortgage and a home equity loan. Generally refers to the ratio of a single loan to the property value.
Applicability Commonly used in situations where multiple loans are secured by the same property, such as in a second mortgage or home equity line of credit. Widely used in various types of loans, including mortgages, to assess risk and determine loan terms.
Risk Assessment Provides a broader view of the overall indebtedness on the property by considering multiple loans. Offers a specific assessment of the risk associated with a particular loan in relation to the property’s value.
Limitations Useful for evaluating the risk of multiple loans combined on a property. However, it may not provide a clear picture of the risk associated with individual loans. Provides a clear assessment of the risk associated with a single loan but may not capture the overall risk if there are multiple loans on the property.
Common Use Commonly used in the context of second mortgages, home equity loans, or other scenarios where there are multiple loans on a property. Widely used in the mortgage industry to determine the risk and terms of a loan.
Example If a property has a first mortgage of \$150,000 and a home equity loan of \$50,000, and the appraised value is \$200,000, the CLTV is (150,000 + 50,000) ÷ 200,000 = 1 or 100%. If a property has a mortgage of \$150,000 on an appraised value of \$200,000, the LTV is 150,000 ÷ 200,000 = 0.75 or 75%.

## Importance of CLTV Ratio in Real Estate Deals

The CLTV ratio plays a crucial role in real estate deals, particularly in assessing the risk of loan default. It serves as a vital indicator for lenders to evaluate the financial health of borrowers and determine the likelihood of repayment. Understanding the importance of CLTV can help both buyers and lenders navigate the complexities of real estate transactions.

One significant lesson learned from the foreclosure crisis of 2008 is the importance of maintaining CLTV standards. During that period, relaxed CLTV standards allowed homebuyers to take out second mortgages instead of making substantial down payments. Lenders, enticed by the booming market, agreed to these terms, but it significantly increased the risk of default.

This led to a spike in foreclosures, as homeowners lacked equity in their properties and faced difficulties in making mortgage payments when real estate prices declined.

By implementing CLTV standards, lenders are better equipped to assess risk, determine loan approval, and evaluate the involvement of both the borrower and the lender in a real estate deal. A higher CLTV ratio indicates a lower level of equity in the property, increasing the risk of default. Conversely, a lower CLTV ratio suggests a more secure investment with greater equity cushion.

For borrowers, understanding the significance of CLTV is crucial. It enables them to make informed decisions about their financial situation and the potential risks associated with their loans. Maintaining a healthy CLTV ratio not only provides a sense of security but also serves as a protective measure in times of economic uncertainty or unfavorable market conditions.

## FAQ

### What is the combined loan-to-value (CLTV) ratio?

The combined loan-to-value (CLTV) ratio is the ratio of all secured loans on a property to the value of the property. It takes into account all loans on the property, unlike the loan-to-value (LTV) ratio that only considers the primary mortgage.

### How is the CLTV ratio calculated?

The CLTV ratio is calculated by dividing the total value of all loans on the property by the value of the property. It is expressed as a percentage.

### Why is the CLTV ratio important?

The CLTV ratio is important in assessing the risk of extending a loan and determining the interest rate. It is a more comprehensive metric compared to the LTV ratio as it considers all outstanding debt obligations and impacts rates.

### What is the preferred CLTV ratio for lenders?

Most lenders prefer borrowers with CLTV ratios of 80% and below. However, creditworthy borrowers may exceed this percentage.

### How does the CLTV ratio impact real estate deals?

The CLTV ratio plays a crucial role in assessing the risk of loan default and evaluating the involvement of both borrowers and lenders in a real estate deal. It helps lenders assess risk, determine loan approval, and evaluate a borrower’s ability to afford the loan.

### Did the CLTV ratio play a role in the foreclosure crisis of 2008?

Yes, relaxed CLTV standards contributed to the foreclosure crisis. Lenders raised LTV and CLTV caps, allowing customers to finance down payments with second mortgages, increasing the risk of loan default.

### How does equity in the property relate to the CLTV ratio?

Having equity in the property incentivizes homeowners to make mortgage payments and insulates lenders from declining real estate prices. A higher CLTV ratio indicates less equity in the property and a higher likelihood of default.

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