CLTV vs. LTV: Key Differences and Their Importance

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Understanding Combined Loan-to-Value Ratio (CLTV)

When you apply for a second mortgage, lenders use your combined loan-to-value ratio (CLTV) to determine your eligibility and loan terms. CLTV is the total amount borrowed relative to your home’s value. Understanding how CLTV works and why it matters with home equity loans and home equity lines of credit (HELOCs) can help you evaluate your options and decide if taking out a second mortgage is the right step for you.

What Is Combined Loan-to-Value Ratio?

The combined loan-to-value ratio is a metric that lenders use to evaluate your application for a home equity loan or HELOC. It’s calculated by adding your primary mortgage loan balance to your desired home equity loan amount or HELOC credit limit, then dividing that sum by your home’s value.

For example, if your home is appraised at $500,000, your mortgage loan balance is $350,000, and you want a $50,000 home equity loan, your CLTV would be calculated as follows:

• Add $350,000 to $50,000, totaling $400,000.
• Divide $400,000 by $500,000, resulting in a CLTV of 80%.

CLTV vs. Loan-to-Value Ratio (LTV)

CLTV is an extension of the loan-to-value ratio (LTV) used when you take out a mortgage to buy a home. The difference is that LTV includes only your primary mortgage balance, while CLTV includes all obligations that use the property as collateral. This can include multiple home equity products.

Using the previous example, the LTV of your primary mortgage would be calculated by dividing your $350,000 balance by the $500,000 appraised value, resulting in an LTV of 70%.

Why CLTV Matters for Home Equity Loans

As with a traditional mortgage, a home equity lender can foreclose on your home if you stop making payments on your home equity loan or HELOC. However, because your primary mortgage is the first lien on the home, your mortgage lender gets first priority on the proceeds from selling the home. Once that debt is satisfied, the home equity lender can recoup what you owe from the remaining amount.

Because foreclosed homes typically sell for less than the property’s market value, there’s a risk that the home equity lender won’t get enough from the sale to cover the full amount you owe. Here’s how lenders use CLTV to determine your application:

• Your eligibility: Most home equity lenders allow you to borrow up to a CLTV of 85%, though some may go higher or lower.
• How much you can borrow: Even with significant equity, a lender’s CLTV limit may impact your borrowing amount.
• Other requirements: Higher CLTVs may come with more stringent eligibility criteria, such as higher credit scores and lower debt-to-income ratios (DTI).
• Interest rate: Higher CLTVs pose more risk to lenders, often resulting in higher interest rates.

Improving Your Odds of Qualifying for a Home Equity Loan

If you’re considering a home equity loan or HELOC, your CLTV is just one of many factors lenders consider. Here are some steps to maximize your chances of approval with favorable terms:

• Only borrow what you need: Determine exactly how much you need and keep your CLTV as low as possible.
• Ensure your credit is solid: The minimum credit score for a home equity loan or HELOC is typically 620, but some lenders may require higher scores.
• Consider other options: Explore other ways to meet your financial needs, such as building up savings or looking into 0% APR credit card offers.
• Shop around: Compare preapproved offers from multiple lenders to ensure you’re getting the best deal.

Check Your Credit Before You Get Started

Before shopping for a home equity loan or HELOC, check your credit score and report. If your score needs improvement, identify areas to work on, such as paying down credit card balances and addressing past-due debts. If you find inaccuracies on your credit report, you have the right to dispute them with the credit reporting agencies.

Once your credit is in good shape, weigh the pros and cons of tapping into your home equity and research all other options to ensure it’s the best path forward for you.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you navigate your home equity options and find the best solution for your financial goals.

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