What Is a Combined Loan-to-Value?
The idea behind a mortgage loan is that the borrower mortgages the property to the lender as collateral in case of default. The lender needs to know the strength of the security. Of course, the property's physical condition and appearance are important factors. Loan-to-Value, known as LTV, and Combined Loan-to-Value, or CLTV, are a mathematical approach to the security's strength. Anyone seeking a loan for a home or business property must clearly understand these concepts.
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Concept
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LTV and CLTV are two parts of one concept. How much of the property's value will the lender finance, and how much will the borrower retain as equity. Dividing the loan amount by the property's value (multiplied by 100) gives you the loan-to-value percentage. For example, if a lender finances 3/4 (.75) of the value, this is 75 percent LTV and 25 percent equity. On purchases, the equity is otherwise known as the down payment. The value on purchases is generally the purchase price, but not always.
LTV Vs. CLTV
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LTV looks at each individual loan in comparison to the property's value. CLTV combines all loans on the property in comparison to the value. For example, one loan is 60 percent LTV, and a second loan is 20 percent LTV. The CLTV is 80 percent. It's as easy as adding up the individual LTVs. If there's only one loan on the property, LTV and CLTV are the same. As the loan balance is paid off, both the LTV and CLTV go down.
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Significance
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When a mortgage defaults, the lender has the right to recoup the outstanding loan amount, even by selling the property quickly at a loss. Financing a high LTV (above 80 percent) is risky, and lenders can require mortgage insurance. The lower the LTV, the better chance the lender has to recoup the balance. The same concept applies to CLTV as well, but there are complicated dynamics in regard to one loan's position in comparison to another.
Risk and Pricing
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The LTV and CLTV determine risk, and risk determines loan pricing, otherwise known as the loan's interest rate. Other factors that determine risk and pricing are the debt service coverage ratio (loan payments divided by income) and credit score. Moreover, one of these factors may compensate for another. For example, a lender may consider a high risk low credit score with a low risk low LTV (CLTV).
Conclusion
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The importance of these factors, called underwriting standards, cannot be overemphasized. In 2010, the United States as a whole, indeed, is now recovering from the aftermath of the subprime mortgage meltdown, otherwise known as loose underwriting standards, otherwise known as greed. Responsible underwriting, on the other hand, now leads us on the road to recovery.
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