Understanding Combined Loan to Value (CLTV)

Image source: sanaulac.vn How to Calculate Combined Loan to Value (CLTV)? The combined loan to value ratio (CLTV) is a critical metric used by real estate lenders to assess the risk associated with a proposed...

Combined Loan to Value (CLTV) Image source: sanaulac.vn

How to Calculate Combined Loan to Value (CLTV)?

The combined loan to value ratio (CLTV) is a critical metric used by real estate lenders to assess the risk associated with a proposed borrowing. It is particularly relevant when there is more than one secured form of financing against the property. In essence, the CLTV ratio measures the default risk of the borrower while factoring in existing liens on the property.

A lower CLTV ratio implies less risk for the lender, indicating that a smaller percentage of the property value is being borrowed against. Conversely, a higher CLTV ratio suggests higher risk. By using the CLTV ratio, lenders aim to reduce their downside risk potential and minimize losses in the event of borrower defaults.

Calculating the CLTV ratio involves three steps:

  1. Calculate the total balance of existing secured loans on the property.
  2. Determine the appraised value of the property, i.e., the current fair market value (FMV).
  3. Divide the total balance of secured loans by the appraised property value.

Combined Loan to Value Formula (CLTV)

The formula for calculating the combined loan to value (CLTV) ratio is as follows:

CLTV Ratio = Total Secured Loan Value / Appraised Property Value

Where:

  • Total Secured Loan Value: The current outstanding balance of the secured loans (existing liens) on the property.
  • Appraised Property Value: The market value of the property based on a formal appraisal.

To convert the CLTV ratio from decimal notation to a percentage, multiply the result by 100.

For example, consider a homeowner with a primary mortgage of $200k who is requesting a home equity loan of $50k with a lien placed against the same property. If the home is currently appraised at $500k, the implied CLTV ratio is 50.0%.

Combined Loan to Value Ratio (CLTV) = $250k ÷ $500k = .50, or 50.0%

CLTV Ratio vs. LTV Ratio: What is the Difference?

The combined loan-to-value (CLTV) ratio is closely related to the loan-to-value (LTV) ratio. However, the main difference lies in the circumstances of the borrowing.

While the LTV ratio considers only the initial or principal mortgage, the CLTV ratio factors in the sum of all existing secured loans on the property. Lenders use the CLTV ratio, instead of the LTV ratio, when there is a pre-existing lien on the property. It helps them estimate the risk of default more accurately.

The maximum allowable threshold of the CLTV ratio varies depending on the specific lender. Typically, lenders set their maximum CLTV ratio up to around 80% for borrowers with a strong credit score and a past track record of meeting their prior debt obligations on time.

Combined Loan to Value Calculator (CLTV)

To dive deeper into understanding CLTV, fill out the form below to access a modeling exercise:

Combined Loan to Value Calculator (CLTV)

CLTV Ratio Calculation Example

Let's consider a real estate investor who is currently applying for a secured loan of $250k. The loan is secured by a commercial property with an appraised value of $2 million.

Furthermore, the property has two existing liens: a commercial mortgage loan with a balance of $500k and a business loan with a balance of $50k. The total secured loan balance, including the proposed loan, is $800k.

Total Secured Loan Balance = $500k + $50k + $250k = $800k

Dividing the total secured loan balance by the appraised property value yields a combined loan-to-value (CLTV) ratio of 40.0%.

Combined Loan to Value (CLTV) = $800k ÷ $2 million = 40.0%

Based on this calculation, the proposed loan is likely to receive approval from the lender since the CLTV ratio of 40.0% falls within an acceptable range and poses no excessive risk, assuming no other pressing issues hinder the borrower from obtaining the requested financing.

In conclusion, understanding the combined loan to value (CLTV) ratio is crucial for both borrowers and lenders. It helps assess the risk associated with multiple secured loans on a property and ensures prudent lending practices.

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