Combined loan to value: CLTV definition and calculations
This article is for educational purposes only. JPMorgan Chase Bank, N.A., currently offers home equity lines of credit (HELOCs) in select states and does not offer home equity loans in any state. Please talk with a Home Lending Advisor to see if HELOCs are available in your area. Any information described in this article may vary by lender.
Quick insights
- Combined loan-to-value ratio (CLTV) is a ratio used in home lending to determine how much of a home’s equity is tied up in secured loans.
- This ratio is often used by lenders to assess an applicant’s potential risk as a borrower, affecting both lending decisions and the terms presented.
- You can calculate your own CLTV ratio by dividing your existing home loans by your home’s appraised value, multiplied by 100.
If you’re considering buying a home or are a current homeowner, you may already be aware of what a loan-to-value ratio (LTV) is. This figure compares the size of a home loan to the lower of the purchase price or appraised value of a property. To a lender, LTV represents one way to assess a borrower’s risk of defaulting on a loan. CLTV is similar to LTV, with the additional consideration of loans the homeowner has acquired since purchasing the property, such as a home equity line of credit (HELOC).
In this article, we’ll further explain the meaning of CLTV and illustrate how it's used in real estate financing. We’ll also explain how you can begin calculating your own CLTV.
Key concepts: Secured loans and CLTV
CLTV is most likely to arise in discussions between lenders and homeowners pursuing a new secured home loan. This is when the property is the collateral to assure the lender in the event of a default on the loan. Common forms of secured home loans include:
- A mortgage: A homeowner’s primary home loan, referred to simply as the “primary loan” or “senior mortgage” when in collection with other loans.
- Home equity loans: Often referred to as “second mortgages,” “secondary loans,” or “junior loans,” these loans are typically funded in one disbursement and repaid in monthly installments like a primary mortgage.
- Home equity lines of credit (HELOCs): This type of revolving loan can be drawn from and repaid repeatedly during the “draw” phase, similar to a credit card.
Check for understanding: The difference between LTV and CLTV
The difference between LTV and CLTV is that LTV only considers the primary loan and is typically calculated as a homebuyer applies for their first mortgage. CLTV includes both the primary loan and any other loans that the homeowner has secured against their home’s value since purchasing it.
How CLTV is used by lenders
CLTV is primarily used by lenders to assess a homeowner for an additional secured loan on their property. This ratio can be used to measure risk, structure the loan and anticipate foreclosure outcomes.
- Risk assessment: By calculating a person’s CLTV, a lender can determine how likely an applicant is to default on a new secured loan. In general, a lower ratio indicates that a loan applicant’s home finances are in good health, and that they can take on additional debt.
- Loan structuring: Lenders also use CLTV to tailor mortgage terms and interest rates for a loan applicant. Using CLTV, they can create a loan offer that aligns with the expected value and profitability of the loan, further helping to ensure financial stability.
- Foreclosure decisions: When multiple secured loans are in play at the time of a potential foreclosure, there is competition for rights to the property. CLTV provides lenders with insights into the potential recovery value of a property, aiding in decision-making to minimize losses.
A higher CLTV does not necessarily disqualify you from obtaining a new loan. Depending on the circumstances, the lender may still allow you to take on a new loan with the addition of private mortgage insurance (PMI).
How to calculate CLTV
The formula for CLTV is relatively straightforward, provided you have the necessary information close at hand. The details you will need include the total amount owed to outstanding loans and the appraised value of your home. The formula looks like this:
CLTV = ( Total amount of outstanding loans / Appraised property value ) x 100
Hypothetical CLTV calculation
Let’s calculate the CLTV for a person who has three outstanding loans, with a home valued at $300,000. The first loan is a primary mortgage of $100,000. The second is a home equity loan of $50,000. The third is a HELOC valued at $50,000. Altogether, they owe $200,000 in secured debt on their home.
( $200,000 / $300,000 ) x 100 = 66.7% CLTV
In this hypothetical, the homeowner has 33.3% equity remaining in their home. It’s up to a lender’s discretion to determine if this ratio, in addition to other details of the person’s financial profile and application, qualifies them for a new loan.
How homeowners can use CLTV
You may be wondering how you can use knowledge of your CLTV ratio for your own benefit. Here are some possibilities:
- Financial planning: You can calculate and use your CLTV ratio to make informed decisions about when to apply for a future loan, such as for a renovation project, to manage your finances wisely and potentially avoid rejection for a loan.
- Risk management: By knowing your home's CLTV, you may be better prepared to manage market fluctuations and choose appropriate insurance, such as home equity insurance, which can help protect you in the event of depreciation of your home’s value.
- Estate planning: CLTV is crucial for homeowners who are in the process of planning their estate. Knowing your CLTV can help you determine the future value of your property and ensure that your heirs are not burdened by the secured debt.
In conclusion
Understanding CLTV in mortgage contexts could prepare you for discussions relating to new secured loans on your home. Accessing your home equity may be beneficial, but it’s important to keep your CLTV ratio in mind as you think long-term. For assistance with mortgage options, consider reaching out to a Chase Home Lending Advisor.
